I like Gordon Aitken, he speaks his mind and though his views are different to mine, he allows you to compare and contrast. Gordon knows insurance, he is not a pension man.

Three ways to get to France. On the ferry you travel with everyone else, the fare is cheap because the passengers share the costs, and if the weather turns the captain slows down and everyone arrives late together; nobody refunds you, because the ferry belongs to the passengers. The Tunnel costs more and the view is worse, but the train runs whatever the weather, because the infrastructure has been paid for and is inspected every day. Or you take your own boat, plan the fuel carefully, and carry a flare in case you are still at sea when the tank runs dry.

Those are the three ways the government proposes to turn your pension pot into a pension, and this piece is about the difference between them. The pensions minister wants to put 17m people on the ferry. The insurers run the Tunnel. Nobody has yet asked whether the ferry has lifeboats.

It is a consultation, not yet law. I spent over 30 years as an actuary, an analyst and a fund manager watching governments consult on pensions, and the pattern is consistent: the broad shape of what is proposed is what arrives, and the arguing is over the detail. I would treat this as something that is going to happen.

Two words matter throughout, and they are the government’s own. A pot is the lump of money you have saved. A pension is an income that arrives every month for as long as you live. Bell’s foreword says the current system “is creating savings pots not a true pension system”, and that the aim is to “make pensions, pensions again”.

The timing caught everyone out, and within a week the debate has become a political fight about pension freedoms. The Times has launched a campaign against the plan, former ministers have called it a nanny state, and Bell has replied that “not a single pension freedom is being stripped away”. The trade press is supportive in principle and nervous about detail. In all of it I have not seen a single piece about capital, buffers or who stands behind the income once it is in payment.

I trained as an actuary when equities were still thought a reasonable match for pension promises, spent the early part of my career analysing the with-profits industry as it promised security and delivered disappointment, and spent 25 years as an analyst covering the companies that write annuities. So I want to do two things here. The first is to explain in plain terms what happens to your money. The second is to ask the question the consultation does not answer, which is what is standing behind the promise, and to say what I think the answer should be.

What happens to your £100,000

Nothing changes at 55. Guided retirement is about the moment you take your money out, not how it is invested beforehand. What changes is the language. From five years before you can access the pot, your scheme will write to you about its default pension, and your annual statement will start to describe your savings as an income rather than a balance.

The default is triggered the day you ring up to take money. Say you do that at 60, take your 25% tax-free cash and ask what happens to the £75,000 that is left. The scheme asks you a handful of factual questions (do you have a spouse, roughly what other income you have, whether you plan to keep working), puts you into a group of people like you, and presents you with that group’s pre-designed pension. You give one consent, there is a 30-day cooling-off period before anything irreversible happens, and the income starts. You can decline and take drawdown, an annuity on the open market, or cash, exactly as now.

Most people will not decline. Since auto-enrolment began in 2012, only around one in ten workers has opted out, against a government planning assumption of nearly 30%, and over 90% of members sit in whatever fund their scheme chose for them. Inertia is not a risk to this policy; it is the policy.

The government’s headline is that 46% of pots accessed last year were cashed in full. Most of those were small: more than 80% of pots under £10,000 are cashed, which is why the consultation exempts them. The real target is the money above £30,000, most of which goes into drawdown without advice. Advice use rises with wealth, and advised money tends to leave the workplace scheme for a wealth manager. Your £100,000 is the marginal case: about half of people with that pot today take advice and go elsewhere, and the other half will be offered the default. If auto-enrolment is any guide, most of them will take it.

The ferry, the Tunnel and your own boat

The consultation allows the default to take one of three shapes.

Option one, the ferry: a retirement collective pension scheme. This is the product the pensions minister is most enthusiastic about. Your £75,000 is pooled with the pots of thousands of other retirees in a trust, invested in growth assets such as equities and property, and converted into a target income, perhaps £5,750 a year with the aim of rising with inflation. It is a target, not a promise. Each year the scheme’s actuary values the pool. If the fund has beaten its assumptions the income rises, say to £6,050. If it has fallen short the income is cut, including for people already drawing it. So the letter you receive in year two might read:

“your pension for the coming year is £5,450, a reduction of 5%, reflecting lower investment returns.”

No conventional annuity in payment in this country has ever sent a letter like that, and nor has any final salary scheme outside insolvency. I expect the first collective scheme to send one to be a bad news story.

Option two, the Tunnel: an insured annuity, bought by the scheme on your behalf. An annuity is the old product. You hand over the money and an insurer pays you a fixed income until you die, however long that is. The scheme would probably run your money in managed drawdown for the first 10 or 15 years, then buy the annuity for you at 75 or 80 (”flex then fix” in the jargon). Once bought, your money leaves your name and becomes the insurer’s liability. A year later you get the same income again, whatever markets have done, because the insurer carries the investment risk and the risk that you live to 100, and holds capital against both. On current rates a level annuity at 60 pays around £5,000 a year on £75,000, once you allow for a spouse’s pension.

Option three, your own boat: managed drawdown with longevity insurance. Your money stays invested and yours, the scheme sets how much you can draw each year, and some form of insurance pays out if you outlive the pot. The paper mentions it in passing and nobody has yet built it.

Over 20 years the gap between the ferry and the Tunnel widens in both directions, and the chart below shows the range. I have had to draw it myself, because in more than 100 pages the consultation contains no illustration of what a collective pension might pay, how far it might fall, or how it compares with an annuity. The minister’s claim of “significantly higher average incomes” has no number behind it anywhere in the paper.

With-profits, which I am old enough to remember

With-profits was the insurance industry’s great pooled product. Policyholders’ money went into one fund, 60% to 70% of it in equities and property, the insurer smoothed the returns across good and bad years, and paid a bonus that was supposed to rise steadily towards a guaranteed sum. I do not think the product was a bad one. Its failure, as I saw it at the time, was a failure of expectations: illustrations at 10% a year, bonuses that fell to 4%, and a mismatch between a largely equity portfolio and promises that, once the guarantees bit, were effectively fixed. Most of the industry closed its funds to new business within a decade of 2000.

With-profits did have two things the new collective schemes do not. It had a guaranteed minimum, and it had an “estate”, a pool of surplus built up over decades, plus the shareholders’ own capital, both of which absorbed losses before policyholders did. A retirement collective scheme has neither. It is a pension trust with no employer, no shareholder, no estate, no regulatory capital requirement and no cover from the Financial Services Compensation Scheme, which protects you if an insurer or bank fails. The members’ pooled assets are the only thing in it. When the fund falls short, the only lever is the pension itself.

Even the smoothing the paper offers is not what it appears. A collective scheme is allowed to spread a cut over three years. With-profits smoothed by putting money aside in good years to pay out in bad ones. A collective scheme that spreads a 6% cut over three years is paying pensions it cannot afford in year one, out of a depleted fund, and the members who remain make up the difference later. It is borrowing from its own future. The ferry has no lifeboats; it has a promise to slow down gradually.

What stands behind each promise

The same asymmetry runs through the regulation. An insurer that writes the annuity leg of a default must value it on the Prudential Regulation Authority’s terms, hold capital to a 1 in 200 standard (enough to survive the kind of year that comes once every two centuries), and submit its assets to supervisory review. A trust that runs a collective scheme answers to the Pensions Regulator, whose authorisation test looks at the design, the people running it, the systems and whether the scheme can pay its own running costs. Nowhere in that test is a capital buffer standing behind the amount of the pension. The consultation treats both as “default pensions” meeting the same design standards. The member will be told that both are a pension for life.

The profession has had this argument before

The profession then changed its mind, decisively, in the space of about five years. The argument, set out by three actuaries called Exley, Mehta and Smith in 1997 and acted on when Boots moved its entire pension scheme into bonds in 2001, was that equity risk does not shrink with the holding period but compounds with it. The cost of insuring a fund against a shortfall rises with the horizon rather than falling. The accounting rules, the 2004 Pensions Act, the Pension Protection Fund and ultimately the European solvency regime for insurers all followed from that reversal.

What followed was two decades of deficits. I wrote about that period as an analyst: schemes that sat underwater from 2002 to 2020, members who doubted they would ever be paid in full, and sponsors who poured in deficit contributions that might otherwise have been investment or wages. Those deficits are gone now, in aggregate at least: on the Pension Protection Fund’s measure schemes were 125% funded in March 2025, though plenty would still show a shortfall against the price of an insurer buyout. My view is that the industry has become rather blasé about why. UK final salary schemes are in surplus because gilt yields rose from 1% to 4.5% in three years and the value of their promises fell faster than their assets. That is a rates move, not a vindication of equity investment, whatever the industry now tells itself. It tells us nothing about whether a growth portfolio can reliably pay pensions to people who have already retired.

I see retirement collective pensions as the pendulum swinging back. Strip away the governance language and the proposal is the 1990s final salary scheme rebuilt without the employer: growth assets, pooled longevity, a target income that depends on returns. The arguments for it are the ones the profession abandoned in 2000. They were not wrong as statements about expected return. They were wrong as statements about risk.

There is no free lunch here. If a collective scheme holds more risk than an annuity, its average outcome should be higher, and I would be surprised if it were not. A cut in a bad year is simply that risk arriving. Pooling moves the risk between members and across time. It does not make any of it go away, and there is no reason to expect the members who end up holding it to be paid extra for doing so.

I should be clear that I do not think the current regime got the balance right either. The capital rules for insurers reward closely matching every future pension payment with a predictable cash flow, and punish any departure from it so severely that every annuity book in the country holds the same gilts, the same investment-grade credit, the same infrastructure loans and the same lifetime mortgages, with no growth assets at all. That has made annuities more expensive than they need to be, and some investment risk belongs in a lifetime income product. The question the consultation ducks is who carries that risk and with what cushion.

What the consultants’ numbers are worth

● WTW: a 25% uplift over an immediate annuity, 15% over flex then fix, and 40% once you count the cost of moving into bonds before retirement.

● Aon: about 50% more than an inflation-linked annuity, in a 2022 paper written when annuity rates were far lower than they are today.

● Hymans Robertson: 30% more than an annuity on average, but in the worst 5% of outcomes the annuity pays 20% more.

The minister’s “significantly higher average incomes” is these numbers, repeated. Three things about them.

These are average outcomes. All three firms will have modelled a range of results; only Hymans put the downside in its headline, and that downside is the figure a trustee should put on the wall: a product that beats the annuity most of the time and loses to it by a fifth in the bad tail. That is a bet with good odds, not a free upgrade, and the people on the wrong side of the bet will be pensioners. The poor path on my chart is my own scenario, not theirs, and it ends in the same place.

Nobody has published a comparison at the costs a real scheme will bear. Respondents to the government’s earlier consultation estimated that a collective scheme costs £1.5m to £10m to set up and £0.5m to £3m a year to run, and the government “agrees costs could be significant”. It has capped charges at 0.75% of the fund. The arithmetic is simple:

● The paper’s own example scheme has 5,000 members in its first year. Running costs of £1m spread across them is £200 a member a year, before anyone is paid to manage the money. On a £75,000 pot that is 0.27%; on a £30,000 pot it is 0.67%.

● A charge of 1% a year on a fund paying out over 25 to 30 years reduces the income it can support by roughly 10% to 12%. A scheme running at the 0.75% cap therefore gives up 7% to 9% of income to costs.

● WTW’s 25% is after an allowance of 0.35% a year for costs, less than half the cap. At the cap I expect the uplift to be nearer 20%, lower again on the £30,000 pots this policy is aimed at, and the annuity’s 20% lead in the bad tail to be wider than Hymans shows.

● An annuity’s explicit costs are a few tens of pounds a year, priced into the rate. Its real cost is the capital the insurer holds, paid once in a lower starting income rather than every year in fees.

The people producing the numbers are not disinterested. Every firm with an uplift estimate either runs a master trust that will host a collective section or is the scheme actuary to one being built. A product that needs an actuary, an annual valuation and a member model for 30 years is a new recurring revenue line for the profession at precisely the moment final salary buyouts are removing the old one. A master trust running a collective scheme provides the longevity protection itself, by pooling its own members, and pays nobody for it. A master trust running flex then fix has to buy that protection from an insurer. When a consultant’s model says the collective product beats the insured one by 25%, it is comparing a product it would run against a product it would have to buy. The modelling may well be right. It is not independent.

Who makes money, and who does not

It will not be a one-sided fight. L&G, Aviva and Standard Life each own a large multi-employer pension trust, and nothing in the rules stops any of them opening a collective section inside it and running the longevity risk in a trust with no capital requirement. If that is the cheapest way to meet the new duty, and I think it is, some of them will do it.

The other constraint is political. When government makes a product compulsory it also makes sure nobody profits too much from it. My expectation is that a default pension will be a utility, and utilities earn a regulated return. The collective scheme already has its 0.75% cap, and the consultation asks whether annuity-based defaults should have one too.

The winners, on that reading, are the firms that own the customer relationship at scale: Nest, which will run the largest default by membership and cannot write an annuity itself, People’s Pension, and the insurers’ own multi-employer trusts. The losers are those whose model depends on selling annuities one at a time, with a medical questionnaire that pays a higher rate to the unwell, since group pricing has no room for either. The retail platforms and wealth managers have been the loudest voices for “freedom and choice” this week, and it is not hard to see why: the default is designed to keep disengaged money in the workplace scheme rather than letting it drift to them.

Nest, the largest default of all, has gone for the Tunnel. In January it appointed Rothesay, the specialist annuity writer owned by Singapore’s GIC and MassMutual, to co-design a bulk deferred annuity for cohorts of its members. Nest runs the drawdown and sets the investment strategy; Rothesay takes the longevity tail on a balance sheet regulated by the PRA. Nest could have waited for the collective option the minister favours and pooled its members’ longevity itself. It chose to pay for a guarantee. Aviva launched its own “flex first, fix later” default in July 2025 with the annuity leg written in-house, and its latest investor presentation describes that default as “driving flows into annuities”. L&G’s framework runs a growth portfolio with a spending rule and steers the member towards an annuity later in life.

On the ferry side, LifeSight, the £30bn master trust owned by WTW, has said its members will go into retirement CDC “unless they choose otherwise”, with the longevity protection coming from the members themselves and the income set each year by WTW’s actuaries. TPT filed the first application to run a multi-employer whole-of-life collective scheme on 4 November, with Hymans as scheme actuary, and says a retirement-only version will follow. Aon plans a whole-of-life collective section in its own master trust from 2028.

One camp pays a shareholder to hold capital against the risk. The other keeps the risk inside the pool and the fee inside the consultancy.

What I would do

The argument for the ferry is that it is cheap and that it will put pension money into growth assets. The argument against is everything above: no buffer, no capital, no compensation scheme, costs that nobody has netted off the projections, and a cut mechanism that will be tested in the first serious bear market after launch. The Netherlands, which ran the largest collective pension system in the world, cut pensions in 2013, spent a decade in political argument about it, and is now converting every fund to individual pension pots, with collective investment and some risk-sharing retained. I may come back to that at a later date.

The insurers, by contrast, are very large companies with very strong balance sheets (in my view stronger than they need to be, which is why they are buying back shares), with shareholders behind them and the ability to raise more capital if required, with longevity pricing in their bones, and with a generation of actuaries who ran with-profits funds and know what smoothing costs and what it is worth. In my view they are built for this. The fact that Nest, with no commercial interest in insurers, chose one to stand behind its own default tells you the trustees who have looked hardest at the problem have reached the same conclusion.

They should not do it under the insurance capital rules as they stand, because a 1 in 200 standard with exact matching produces the all-bond portfolio the government rightly wants to move away from. The Pensions Regulator’s superfund regime already offers an alternative: a 99% probability that the fund is at or above its minimum funding level at the end of five years, with a capital buffer sized to that test and provided by a commercial operator who wants a return on it. That standard is looser than the insurance rules, it is already in force under a statutory framework, and it was designed for pensions with no employer behind them. Apply it to default pensions, let the backing fund hold a modest growth allocation against it, and require the buffer to be funded at the outset rather than borrowed from future cuts. That gives the member a higher starting income than a gilt-backed annuity, a cushion that an unfunded collective scheme cannot offer, and a shareholder standing behind the cushion.

The government is right that annuities became too conservative and that people need a default that pools their longevity. In my view it is wrong about who should stand behind it. A pension for life ought to be backed by capital, and in this country the capital sits with the insurers. Put 17m people on the ferry if you like. Give it lifeboats first.

Gordon Aitken’s disclaimer

Gordon Aitken runs Aitken Advisory, providing strategic advice on life insurers and pension funds. I work with investors, insurers and advisers on transactions, capital strategy and market positioning. As I did throughout my sell-side career, I meet fund managers and investors for one-to-one briefings on the sector. If you would like to arrange a briefing or discuss a potential engagement, click the button below to email me.

The content of this publication reflects my personal views only and is provided for information purposes. It does not constitute investment advice or investment research, and I am not acting in the capacity of an investment adviser. I own shares in some of the companies mentioned. Readers should carry out their own analysis or seek professional advice before making any financial decisions.