Paul Todd sort of said

“float and fix” is sort of good enough for most people.

This blog doubts it – the devil is in the detail. Money builds up in pots in different ways but without anyone able to compare what they  have  compared with others. The same will not be said of those who are taking their pots as pensions.

There will be conversion rates between pots and pension payments and people will want to know the terms on which this happens.

If you (as Nest say they will do ) say that the expected annual payments will rise with prices  so long as their is money in kitty to pay the increase then when do you break that rule? And do you start capping inflation rises at 5% and ensure that there is a buffer for high increases and low returns happening a few years in a row?

What do you do to initial pensions to make the price inflation reasonably certain? Saying that you will pay increases based on what is in the fund starts people paying a lot more attention to the capacity to pay what isn’t an increase but the core pension  – next year.

If you can’t meet an inflation increase because the money’s not in the fund, do people ask whether the pension that has built up so far might go down if things get really bad?

I say this because people get a lot more interested in their pensions when they are in payment and I think people are going to get problems by floating , not least by what you “fix at”.

There will of course be an effort at executive and fiduciary level not to see a pension go down at Nest;  this will become a lot simpler as the pensioner gets to 85 where Nest will have effectively reinsured their promise using a bulk purchase annuity and stopped offering “money back” to pensioners.

But in as much as Nest is a collective scheme, its capacity to meet all promises is subject to the question – “is there enough money“,

I am not arguing for total certainty, I believe that a proportion of the payment should be bonus to the certain amount – that is fine so long as we accept there is “shared ambition” to do more than guarantee.

But I suspect I will want to know that there is a locked in level of payments and I suspect that the expectation is a contract in the saver’s mind which is of critical importance.  It is a worry with Nest. If there was not enough money to pay the basic promise, would savers expect to see their pensions go down?

Disappointment with Nest pensions

Here there is going to have to be  very severe prudence in the in the initial pension and my worry is that people will compare that low pension promise with what can be bought as a level annuity and they may walk away from unambitious Nest promises.

I am also worried about health.  People in bad health can get annuities upgraded and if they cannot get an ill health increment on their float and fix then how’s that going to work?

The nature of float and fix is tricky 

People may assume “floating” Nest pensions will be nationalised when they “sink”.

And why the obsession with how people appear to spend money in retirement?  Many people just spend more or less what they have.

Spending is  much affected by how the state pension plus a small extra rises. Leave it up to people. Give them more up front and explain protection is what they get from the state

People are not fools. Nest are going to have many people to whom they are paying  pensions who will read the papers and compare the state pension and defined benefit schemes (both private and public).

It may not be good enough to talk about floating pensions as good enough. Retirement incomes simply aren’t floating to many simple people and I suspect that there will need to be an explicit assurance from Nest that no other pension scheme will give, that it will stand behind the core pension on offer.

Put another way, “best endeavours” needs proper explanation.  Otherwise, the assumed assurance that if thing goes wrong with Nest , the Government can nationalise away the problem. That may be what people will think they’ll get. I am a Nest saver and I will understand that Nest’s promise is properly capitalised.

Famously, a survey of Nest savers in its early days found that 40% of members thought they Nest would give them extra State Pension. Thanks to Ray Chinn for this.

Good enough to be thought DB and CDC

Finally there is a question for the rest of the master trust market, especially People’s Pension , NOW, Cushon and Smart who all have pretensions to make the cut in 2030 and 2035. They will have a lot of savers like Nest’s and they may expect the same thing as Nest are offering (though from the provider and not the State- some may think that pensions are protected by the PPF).

In my opinion, some of these schemes will take on hybrid status, being DC going up and CDC/DB on the way down. Is it fair that Nest gets there for free.

The expectation of a core pension is not available to defined benefit pensions and reduces the point of CDC, what is the point of being one when flow and fix is so easy to comply to?

Nest has taken on both roles as DB and CDC surrogate. It does so without having to do any of the hard work needed to meet DB and CDC rules. If best endeavours can work like this for Nest, why not for every master trust – why not every DB and CDC scheme?

Why don’t we just hand our pension system to insurers?