Increasing rates of a pensions at inflation (CPI) is half the liability of a pension promise says my friend and colleague Chris Bunford.

Another actuary, Andy Young makes the point that we do more than promise inflation protection with the triple lock

It is the increases on the state pension that make it so expensive. This is a report of our Pension Minister speaking in parliament (pictured above)

Andy Young used to advise pensions ministers on the cost of increases, he knows what he is talking about and Torsten Bell has for many years been warning us that we undervalue the triple lock on our pension increases.

Torsten Bell discussing state pensions in parliament recently

All the evidence is stacked in favour of us valuing the kind of increases we get from the state pension, it is what most of us get from occupational DB plans and it is what CDC will give (and the quotes for retirement income from your DC plans won’t show when you go on the dashboard).

There are of course those who suffer the outrageous unfairness of getting no increases on their occupational pension (the pre 97 pensioners) and they lose over time more than the WASPI women lose  from State Pension Age deferment. The WASPI and Pre 97 frozen pension campaigns are the front and back of the same coin. But I wonder which we worry about more. I think I find an answer in our behaviour. Those people who chose to buy an annuity with their pot ( a number increasing lately) do not generally choose to buy an increasing annuity. It’s still not 20% of those who buy annuities that buy any increase.

Graph from Retirement Line – thank you Mark Ormston

That’s because, we value a higher income today rather than an increasing income tomorrow.

It was an act of supreme responsibility that the Government decided to increase the state pension by the higher of inflation, wage increases or 2.5% .  It was a huge shift of support to those most needing the state pension from general taxation.

What Andy Young talks about in his Linked in post is that the increases used to be on both state pension and SERPS and when we lost SERPS we got DC pots from Auto-enrolled pension saving systems that lead to anything but inflation linked pensions!

If you are Torsten Bell you see from state funded pensions (including the fully inflation linked public sector occupational pensions) which will pay an increasing pension. On the other side of pension planning he sees private sector “pensions” which are just pots of money. Those pots are being exchanged by a small number of us for annuities – for the most part level annuities.

The pots will appear on our dashboards as what the pots can buy as level annuities and even then the income will be shockingly low to many looking at their pots that way. The pension schemes bill/act will mean that the majority of us will get our pots converted by default into a flex then fixed annuity or into a retirement CDC.  If you are Torsten, you have to think hard about the amount of increases built into the retirement income offered for life.

So just as the Pensions Minister that we may not have triple lock increases on our state pension , he has to think about how to get some kind of increases into default retirement income into pots – converted into lifetime retirement income.

My question to myself and to you readers is whether we really think about our future retirement income as “when we get it” or “how we get it”. Most of  workplace pension DC pot  savers have enough to retire for a bit from 55 on what we’ve saved but not enough to retire for our lives. Those who do not cut and run early (and the FCA say a lot do) will keep  money rolling up until the default cuts in and then the defaulters will get paid what the Government tells DC pensions they must give.

The default retirement income under flex and fix has been offered us by Nest (an increasing annuity from 85 and an increasing income from drawdown before then). Retirement CDC will be something like that, without the insurance and the freedom of Nest’s flex drawdown pot. Nest is promising increasese on its default retirement income

Whatever the choice of DC pension default , the impact of any mandated pension increases will be to  depress the default income we get from what we see on our  pensions dashboard. The dashboard will be quoting the level annuity for projections.

This is the second of the Torsten Bell’s problem with increases. Will he be the Pension Minister that makes increases on retirement income part of the default? Will Retirement CDC and “flex and fix” be the two choices to consolidated DC schemes and will people accept that the triple lock is too great an increase (just as annuity purchase was and is no increase for most of us).

In the long term, CPI increases may be adopted for state, public and private pensions (they’re already paid by private DB schemes).  In  the next five years , we’ll have  more discussion about the cost of increase promises to our DC retirement income.

Royal Mail’s CDC scheme promises CPI +1%. Is that 1% – private pension’s triple lock?