Matthew Webb has sent me this article and I’m very pleased he has. It is not the way I feel but I respect what Matthew does.
He is now as Executive Director, Global Benefits Integration and Enablement at Comcast .
Previously he has been Head of Benefits at the London Stock Exchange/Refinitiv/Thomson Reuters I first meet him when he was running UBS’s pensions. Before I knew him he had run pensions at Merrill Lynch and in the deep past for Burmah and British Airways. If stalwart means anything, Matthew is a stalwart of pensions and I’m very proud to publish what he’s written.
It goes without saying that it is contrary to what collective (CDC) pensions are about, but that does not mean that Matthew is wrong. I do not think that most of the employers he has run schemes for, will embrace collectivism, they need what Matthew stands for.
In Defence of the Pension Pot
It has become almost an article of faith within the pensions industry that retirement
income is good and pension pots are bad. But what if that framing is misleading? What
if, for many retirees, retaining a pension pot is precisely what allows them to achieve
better retirement outcomes? As the pensions industry increasingly shifts its focus from
pension pots to retirement income solutions, it may be time to ask whether we are in
danger of overlooking the advantages that defined contribution savers have spent
decades building. This may be a contrarian view, but it is one that deserves
consideration.
For much of the last decade, the debate around defined contribution pensions has
revolved around a simple proposition: pension pots are merely a means to an end, while
a secure retirement income is the real objective. Few would disagree with the latter. The
purpose of a pension is, after all, to support people throughout retirement.
Yet there is a growing tendency within the industry to portray pension pots as a problem
to be solved rather than an asset to be valued. Whether through annuities, collective
defined contribution schemes or new retirement income solutions, the direction of
travel often appears to assume that members are best served by converting
accumulated capital into an income stream as quickly as possible.
While this approach undoubtedly has merits, particularly for those seeking certainty, it
risks understating the considerable advantages that come from retaining ownership of a
pension pot throughout retirement.
Retirement does not end the investment journey
One of the most persistent misconceptions in retirement planning is the idea that
accumulation stops at the point of retirement.
A member retiring at age 65 today may reasonably have a life expectancy extending into
their late eighties and potentially beyond. Their investment horizon may therefore be 25
or even 30 years. In virtually any other context, an investor with a 30-year horizon would
still be expected to hold a meaningful allocation to growth assets.
Yet retirement is often treated as a line in the sand, beyond which investment growth
becomes an undesirable risk rather than a valuable opportunity.
Retaining a pension pot allows the assets accumulated during working life to continue
working throughout retirement. Rather than simply drawing down capital, members can
potentially generate investment returns that partially offset withdrawals, inflation and
increasing longevity.
A drawdown strategy of around 4% per annum combined with a diversified portfolio
targeting long-term returns of 5-6% per annum does not represent a particularly heroic
assumption. While future returns are never guaranteed and sequence-of-returns risk
remains real, such expectations are broadly consistent with the long-term objectives of
many balanced retirement portfolios and withdrawal methodologies used in practice. The FCA itself recognises that many retirees remain invested and exposed to investment
risk throughout decumulation, while industry retirement income modelling commonly
assesses withdrawal rates in this range.
The result is a simple but powerful observation: retirement capital need not merely be
spent. It can continue to contribute to retirement outcomes.
Flexibility has value
Retirement spending rarely follows the neat patterns assumed by theoretical models.
Many retirees spend more in the early years of retirement when they are active and
healthy. Expenditure may then decline before increasing again later in life if care needs
arise. Large one-off expenditures, family support, home improvements and changing
lifestyle aspirations are all common.
A pension pot accommodates these realities.
By contrast, a fixed income stream, however secure, may not always align with real world spending patterns. Flexibility is not simply a lifestyle preference; it is a valuable
financial characteristic. The ability to vary withdrawals in response to personal
circumstances can help members optimise their resources over an entire retirement
rather than conforming to a predetermined income path.
The pensions industry often focuses on managing risk, which is entirely appropriate.
However, risk minimisation should not become the sole objective. The ultimate goal
should be maximising retirement wellbeing, and flexibility frequently forms part of that
equation.
Ownership matters
Perhaps the greatest advantage of a pension pot is that the member continues to own
the underlying capital.
This point is sometimes overlooked in discussions about retirement income solutions.
When a member purchases an annuity or participates in certain forms of longevity
pooling, they exchange capital for the promise of an income. That can be an excellent
trade for some individuals, particularly those who place a high value on certainty or who
are concerned about outliving their assets.However, it is still a trade.
Retaining a pension pot preserves options. Members can adapt to changing markets,
changing health conditions, changing family circumstances and changing spending
requirements. They retain visibility over their assets and control over how those assets
are used. In an uncertain world, optionality has value.
The family dimension
Retirement planning is often discussed as though it exists in isolation from broader
family finances.
In reality, many people care deeply about what happens to their remaining assets after
death.
Historically, one of the attractions of drawdown has been the ability to leave unused
pension assets to spouses, partners, children or other beneficiaries. While changes to
inheritance tax treatment from April 2027 may reduce some of the tax advantages
associated with inherited pension wealth, unused pension assets can still form part of a
family’s broader financial planning in a way that most income-only solutions cannot.
This is not simply about inheritance. It is about recognising that retirement decisions
are often made within the context of wider family objectives, not solely individual
consumption.
Risks should be managed, not feared
None of this is to dismiss the risks associated with drawdown. Inflation, market volatility, sequencing risk and longevity risk are genuine challenges. Poor decisions can undoubtedly lead to poor outcomes.
But there is a difference between recognising risk and assuming that risk can only be
addressed by surrendering capital.
Investment strategies can be designed specifically for decumulation. Withdrawal rates
can be adjusted. Cash reserves can provide short-term resilience during market
downturns. Dynamic spending rules can help manage sustainability. Diversified
portfolios can continue to provide exposure to long-term growth while mitigating some
of the effects of volatility.
Indeed, much of the innovation in the retirement market today is focused on improving
the management of these risks rather than eliminating investment altogether. The FCA’s
work on retirement income and the actuarial profession’s exploration of decumulation
pathways both acknowledge that retirees often face multiple objectives, including
sustainable income, flexibility and legacy planning.
It does not have to be all or nothing
Defending the pension pot does not require opposition to annuities, CDC or other
retirement income solutions. In practice, some of the most compelling retirement strategies may be hybrid approaches.
Members could retain invested assets during the early years of retirement when
flexibility is most valuable, before purchasing an annuity later in life when mortality
credits become more attractive. Others may choose to secure a baseline level of
spending through guaranteed income while maintaining a drawdown pot for
discretionary expenditure and unexpected costs.
The choice should not be framed as one between complete security and complete
flexibility. The real challenge is determining the right balance between the two.
Conclusion
The pensions industry is right to focus on retirement income. Income is, and always will
be, the ultimate purpose of retirement saving. But income should be viewed as an outcome, not necessarily a product.
As policymakers, providers and trustees search for better decumulation solutions,
there is a danger that we forget what makes defined contribution pensions valuable in
the first place. A pension pot is not merely a staging post on the way to retirement
income. It is a source of flexibility, ownership, adaptability and long-term growth
potential.
That may be a contrarian perspective in today’s decumulation debate. Nevertheless, it
is worth remembering that for many retirees, the most effective way to generate
retirement income may not be to give up their pension pot at all.
