One of the questions that buzzes in my little brain is just how much indexation I am getting on my pension.
I get a pension from Eagle Star (now Zurich) which pays income that increases by CPI up to 5%.
I get a pension from my AVCs which is level (it had to be as it was guaranteed to convert from my pot at a level conversion rate.
I will have a state pension from November 2028 increasing by the triple rate (till then and after then so long as the Government maintains it).
When I get to November 11th 2028 I will get my pension and a reduction in my Eagle Star staff pension because some of it is a bridge to my state pension.
Then I have two pots, one (smaller ) pot which, unless I interfere, convert to a default pension and pay out from my chosen retirement age (later as this is my workplace pension and I want it to take my savings so long as I work.
Then I have a larger pot with Legal & General pot which will pay out when I choose it too, but if I make no claim on it, it will pay me an income from 65 (the age my workplace pension provider chose for me in 2010). The Nest and L&G DC pots will pay something like a pension. Nest have said it will index income at CPI, L&G have not made a statement but the assumption from the Pension Schemes Bill is that the retirement income will last for a lifetime and I expect that this will mean being maintained in real terms.
So only income from my Eagle Star annuity is not broadly in line with inflation proofed and I am comfortable that if the money in my pots provides me with either a DC or CDC income, I will get protection. At a high level I am not concerned that I will run out of income or that my income will reduce in real terms.
I don
I asked a friend who knows about these things what he would want if he was in my position, here is what he wrote me.
I don’t like CDC targeting CPI and even more not CPI+1%. I like CPI-1%.
I asked him about the State Pension as this is the source of income for most of us
1. SP rises by earnings (forgetting the triple lock). So low to middle earners with private pension up to the SP level will have close to CPI overall (give or take).
I asked about fairness; will those on low incomes with short life expectancy get value from DC and CDC income,
2. It is fairer. It front loads decumulation, a little, relative to CPI-1%. So gives the shorter lives a bit more. Generally the longer lives will be better off so can stand the slightly higher risk of actual pension cuts .
I said to my friend I knew that he’d been involved in the making of state and private pension policy. including the requirements to offer real pensions (inflation linked).
I always preferred CPI-1% than the caps we introduced, which hit people most when support is most needed. Never got my way.
This will be a topic of our discussion on Tuesday (27th January) when we will be working out whether to go for whole of life CDC or wait for Retirement CDC.
If you are free at 10.30 am , you should join us . Over 50 people attended our last CDC event
Your friend who advocates (uncapped?) CPI minus revaluations sounds to me like an actuary who would use “matching” assets like index-linked gilts and/or conventional gilts were State pensions to be funded, or if inflation increases are to paid within a funded occupational scheme?
Index-linked gilts (which are still based on RPI not CPI, at least until 2030) have returned minus 0.9% per annum on average over the past ten years, while RPI has averaged plus 4.6% per annum and CPI has averaged plus 3.4% per annum.
Long-dated “conventional” gilts have returned minus 2.0% per annum on average over that period.
No doubt their absolute and relative underperformance as “matching assets” confirms the “liquidity premium” inherent in our gilt markets, at least according to many actuaries, as well as the excess demand for gilts, even some leveraged gilts, by actuary-led trustees of many DB schemes in the UK.
Investment in diversified growth assets (equities, properties) on the other hand could have generated stable and increasing yields and some long-term capital appreciation to be able to afford CPI plus revaluations?