Taking the “e” out of pensions is not “energising” me!
There was a moment in Paul Todd’s excellent talk when I asked myself who owns the rate at which my pot is returned to me. The answer is not clear even to Nest, it depends on what the provider of annuities tells them they need to restrict their monthly pay out to.
In short, the rules are made by the insurance companies. My discussions with annuity providers who are being asked to price deferred annuities for us folk in Nest is that this is really not the kind of business they want. There aren’t many people in Nest who are over state pension age – let alone 85. 85 is the age at which the insurance that Nest will buy to ensure the pension they provide is maintained and if I was an insurer , I would not be fighting to offer a super competitive deal on this right now.
I have had discussions with reinsurers about buying out liabilities and have been quoted 3% of the money coming in from pots to meet the kind of risks that Paul was talking about when describing “DC pensions”.
It is possible to model anything when you have 14m savers and some of the best data in the world. There is no doubt that Nest will get quotes for buying out the risk of us living too long, but is there any guarantee they will get value for money? Insurers and reinsurers offer rates based on prudent assumptions (they try to minimise the risks to their shareholders).
Collective insurance?
I find it odd that the Government’s pension, Nest , does not do what other Government pensions do and rely on the British pool of workers , who Nest cover. Nest has 14m savers, in 2021 (the last date we have data for) the State was paying pensions or aged benefits to 23 m people. The Government knows how long people are living, they pay these 23 million people with the surety of tax raising as their long-term insurance.
I want to ask my Government why it is relying on the insurance industry to set the pension rate that I (a soon to be 64 year old) will get by default from Nest? Does Government not have a Government Actuary’s Department (GAD). Does it not set discount rates for our £400bn funded Local Government Pension Scheme.
Is there not a huge amount of knowledge about the specific group of workers who are saving with Nest available to Nest from the OBR, the PPF and the various actuarial bodies such as the CMI?
In my view Nest should be laying down the terms on which they expect annuity providers to work and not going into consultation with them to establish the pension they pay to those who are younger than 85 (or even 75 when some kind of glidepath towards reliance on insurance will begin at Nest).
Here is where I have my worry and I am very far from sure that Nest are setting a good example to the master trusts. If value for money is based on selling out your rate setting to annuity providers who don’t come into play till 85 (if at all) then Nest is not taking on much collective insurance at all.
Collective investment?
If insurance companies are to dictate the rates of conversion of pots to pension, then why don’t they determine the investment of Nest’s pension plan? If Nest is to have insurance inside then why doesn’t the same influence creep into the investment strategy of Nest’s default decumulation fund?
How long before we see the much vaunted CDC approach to investing for increases in pots being limited to a very small portion of the Nest fund with the majority of the money having its eye on meeting the demands of the insurer, not just for payment but for payment in the kind of assets they can use – in short quoted bonds and private credit.
Now the argument for “value for money” becomes second to security at the price demanded by an insurer.
We thought we had freedom from annuities but are we?
The rate at which Nest decides to offer pensions will be benchmarked against the rate people could buy an annuity. Will there be any attempt to offer more than an annuity would buy when bought at outset of the pension?
Nest are not saying it will, they are saying they will consult with the annuitant about what they pay. I do not find that satisfactory. I want to hear from Nest that they will provide value for money by offering more than the equivalent annuity. That may not please the annuity providers who they are currently negotiating in a procurement exercise and I suspect that Nest do not want this discussion to happen at this “sensitive time”.
But the truth is that if Nest does not set a rate well above the annuity rate at outset, then there should be uproar. Because pension investment in the long term delivers more than an annuity can deliver. If we don’t believe that, we should make LGPS and other Government funded pension plans insured. We should return to the original plan for Nest – a carousel of annuity providers who will pay the “pension” as an “annuity”.
I want energy from Nest, not the weak talk of setting pension rates in consultation with its annuity insurer.