In an article last week he asked why some DC pension schemes are still defaulting members towards “de-risking” their pot from annuity conversion rates falling. It might have been a weird question 12 years ago – before almost all of us having to buy an annuity with our DC pot. Then with a flick of the switch , the Chancellor turned off the lights on annuity purchase and ever since not much more than one in ten of us choose to.
It is laziness or a genuine belief that the bulk purchase annuity practiced in DB plans should be practiced with our individual pots, but there are still trustees lining their savers (oops members) up to buy an annuity.
Actually, some trustees of DB schemes are also trustees of the same sponsor’s DC schemes and some DC pots sit within trusts that manage everyone whether DB or DC (known as hybrid). They will know, if they are following the cost of buying out their DB liabilities with a bulk purchase annuity (BPA) that it’s cheaper buying out and best value for money buying into annuities than at any time this century. There has been an uptick in purchasing of annuities by private individuals, accelerated by worries around Inheritance Tax on unspent purchased pots.
But even so, treating savers as if they had DB pensions is a notion that went out with George Osborne’s 2014 budget. John Greenwood’s gripe at this time is the VFM consultation being carried out by the FCA/TPR which has a section carved out for DC schemes still targeting annuity purchase.
The latest VFM consultation gives concessions to schemes targeting annuity – it’s hard to see why these schemes would continue to exist. John explains
The latest iteration of the value for money framework should make life a lot easier for providers that have not moved members from annuity-targeting strategies following George Osborne’s pension freedoms. The latest draft of proposals is still under consultation, but it is understood to be pretty close to what the final rules will look like.
It comes as no one who has been living in the lah-lah land of regulatory VFM thinking that default annuity purchasing can be considered a form of value for money.
It proposes that rather than being compared with schemes targeting drawdown, defaults still targeting annuity should be assessed against a comparator group of other schemes targeting annuity, for the 0 years to retirement metric. Cash-targeting defaults will also only be compared with their peers. For providers and trustees still running annuity-targeting defaults, this should be cause for a great sigh of relief, as these funds will have, in monetary terms, done much worse than those targeting drawdown.
Neither John , nor me , nor any of his readers unless they work for TPR or FCA can think it makes sense for members of schemes that have had funds invested well in annuity or cash targeting strategies to be told they got value for money relative to those who have done even worse by being badly invested in annuity and cash.
The object of DC pension fund investment is to maximise the pot in this VFM assessment. If it was to maximise the pension then it would included annuities purchased, guided retirement defaults and collective pensions (CDC).
It is absolute nonsense. Which trustees are still doing either thing?
I can only think that there is a kind of “woke” belief that tiny minorities of trustees who have religious considerations or a refusal to accept that anything but a guaranteed lifetime income will do, will get special treatment. This is woke ness gone mad! It turns against trustees who target annuities and have members who cannot buy annuities because they are strictly Sharia investors. It targets almost all pension schemes except for one obscure master trust which holds views that do not allow for investment in equities or bonds but just in cash.
To set up a Framework for Value for Money that caters for obscure views on “value” for member’s money makes for a world of infinite possibilities but no definitions.
John ends up throwing his hands up in the air (metaphorically). People re,aomn in annuity based DC schemes because investment for growth might go wrong.
One provider’s head of corporate told me as much about 10 years ago. ‘I’m not moving members even if I know it would be better for them, as we might get sued’.
John is clearly mainly worried just about the defaults accumulation funds of trust based DC schemes which get let off the hook..
For years I’ve struggled to find out the extent to which annuity-targeting defaults have remained, and the reasons for their existence. Their appearance in this latest VFM consultation, and the fact that the rules have had to be amended to account for their predictably poorer performance, suggests to me that the problem is greater than is generally considered.
The new rules may let these schemes, whose strategy is very hard to defend, off the hook when it comes to the performance test. I suspect the bulk of annuity targeting defaults is meaningful with GPPs (the responsibility of the FCA). These are less scrutinised for good governance than trust based schemes and often neglected (witness the IGC reports for Virgin’s GPP which could not get traction with the provider). John, surreptitiously includes the capacity of GPPs to be consolidated from 2028,
The new rules may let these schemes, whose strategy is very hard to defend, off the hook when it comes to the performance test. But at least the contractual override will enable them to be killed off.
Only GPPs will be impacted by this contractual override – we know what you mean John!
