A beautiful gentle explanation about why pensions form part of pay from an American economist-minded “benefit-Jack”.
“If pensions are deferred pay, bosses shouldn’t allow a pay cut. … Of course the questions that employers could be asking their staff about what mattered most. Would it be the rate of income provided from the savings? Would it be the certainty of payment at the agreed amount or would it be access to the pot from which the pension was paid?”
Certainly, benefits (including pensions and retirement savings) are just another form of wages – ask most any economist.
Each of those outcomes, the pot balance, the rate of income, the certainty of an agreed (monthly) amount are all available – regardless of whether the plan design is DC or DB. Either/both can provide for those payout forms. The only question is who is to decide on the desired guarantee (pot balance, rate of income, certain monthly amount), and who is to pay for that guarantee.
Of course in a perfect world, employers should take all decisions on pensions as a staff benefit with due diligence. In practice they can and will take short cuts, simply signing up to auto-enrolment or in future to the default offered by their workplace pension as a solution that is recognised by regulators (FCA and TPR) as compliant with the Pension Schemes Bill.
Some employers will go further than others but no employer should be happy to see second rate decumulation offered to staff or ex-staff drawing what they consider their pension.
The Government has got a challenge ahead of them. There has been work done on VFM in accumulation and it’s ok if rather challenging for consumers. There has been little work done in the private sector about VFM for those decumulating (spending) their pots as pensions.
This is a serious matter that needs attention. We are talking with organisations about what they are doing and finding there is very little agreement about what will happen from 2027. We intend to think of the needs of the consumer which we regard as three-fold
- To have an income that lasts as long as they do (aka pension)
- To get value for money from that income
- To get access to this income PDQ but not later than 2027.
Of course there is a lot to come. There is a debate about the rate at which pension is paid, the security of that income and the flexibility of the pension to offer lump sums or even a single payment if requested.
We need a VFM measure that can be sophisticated as you like for professionals but which is as simple as single numbers marking the offering to savers by way of pensions.
We need employers to take pensions more seriously, to consider them as deferred pay and compensation. It’s legal and economic sense!
Thanks to Benefit Jack for bolstering my endeavours! I hope that this clip from his CV tells you what he’ about – and what Value in the workplace should be about.
Why invent the wheel? The life long income is the annuity a simple mirror image of the whole of life policy.
The question is who provides it.
Surely the only guarantee on longevity of payment would be the governemnt.
If the insurance company wishes to offer a better rate along with the greater risk of default then that judgment is one requiring advice.
VFM has to be measured by results achieved in excess of inflation.
Comparison in terms of price are just disguising mediocrity.
RPI today up by 4.4%
People can get at least inflation increases from the State Pension, if that is the benchmark for workplace pensions then the initial rate will need to be a long way below the 7% people can get from annuities. I’d like to think that organisations like Nest will look to achieve substantial increases on top of their initial rate and that the initial rate is somewhere around the level annuity rate. We think that rate should be benchmarked against the annuity rate (single level).
I fear however that no one is going to be very ambitious and take a long-term collective view on returns, so we will end up downgrading to annuity style investment and annuity style returns. As a pensions industry we are very prudent (a nice word for over-cautious).
Thanks. In the states, there are so many insurers offering product that is suitable for decumulation of your “pot” that some believe the best alternative for guaranteed income would be an annuity purchase platform. For example, see: https://www.incomesolutions.com/
While I have yet to use this platform, I know others who have, and there are many insurance products that would meet your requirments to:
(1) Have an income that lasts as long as they do (aka pension)
(2) Get value for money from that income
(3) Get access to this income PDQ but not later than 2027.
Comparison of monthly income will be the best VFM measure – so long as you are comparing apples to apples (the same type of insurance/annuity product). And, unless you price all comers, such as through a platform, you might miss the insurer offering the best VFM.
As you know, in the states, I favor deferring Social Security as the base “annuitization” decision because of fair pricing, no fees, and because the benefit is in the form of an inflation-indexed, guaranteed, lifetime income with an automatic surviving spouse benefit.
If I were king, or PM, or whatever, a public option that allows individuals to roll over their “pot” in exchange for addition income (“buy into”) from the state pension system would be something to consider.
With respect to defined benefit pensions, the challenge in the States is that few appreciate pension plans. Few appreciate pension plans because, for the last 7 decades, median tenure of American workers has been less than 5 years. So, most don’t vest. And, of those who do vest, the accrued benefit is modest … and so, it is often underappreciated, undervalued (at least until the individual retires).
I like your thinking, we don’t have some of the issues your pension schemes offer – vesting went a long time ago for those who can still join a DB plan. But we do have annuity platforms in the UK which work very well (Just, Retirement Line, Hargreaves Lansdowne etc.). I think your thoughts about using the state pension are understood in the UK, a lot of people do maximise their state pension rather than fund private pensions but I suspect their are niceties in the states that we don’t know about.
There are many in the UK who consider annuities do not provide VFM which is why the scrapping of mandatory purchase of annuities was scrapped in the 2014 budget, but we haven’t found anything better (or more accurately we haven’t made alternatives such as CDC and DB pensions available as alternatives.