21 September 2021

Henry Tapper, chief executive officer at AgeWage, discusses current and future pension trends

Nearly ten million British pension savers risk running out of money in retirement because they do not know how to make their savings last, according to new analysis which sheds fresh light on the complex choices facing retirees.

In 2015, big changes to tax rules handed millions aged 55 and over full control over how they access their retirement cash, including spending the fund in one go. But a new study from LV= has found that, faced with increased choice, many investors are struggling to make good decisions about how and when to take pension cash.

A poll of 4,000 UK adults, published in August 2021, found that just under a third planned to manage their own finances in retirement, known as the DIY approach. Applied to the whole population, that would be some eight million people out of an estimated 29 million pension pot holders. The poll can be located here: http://ow.ly/kfl230rTUGw.

35% of those surveyed also admitted they knew nothing about product options at retirement or the pros and cons of each. Just over a third (34%) of those who participated in the survey said they did not know how to ensure their money lasted through retirement.

Automatic enrolment (AE) means that almost everyone will reach retirement with at least one pension pot and most will have multiple pots, each presenting the same problem. This is what the economist Bill Sharpe calls, “the nastiest, hardest problem in finance”. He is referring to turning a capital sum into an income that lasts as long as we do.

While we have pots that don’t turn into pensions, we seem intent on turning our pensions into pots. Over the past five years, the Financial Conduct Authority (FCA) estimates that over £80 billion, due to be paid as pensions from guaranteed defined benefit (DB) schemes, has been converted to pension pots. In one infamous case, 3,700 steelworkers (almost a quarter of the membership of the British Steel pension scheme) elected to convert their pensions into pension pots.

Many were advised to do this by financial advisers who have been censured by the FCA precisely because many converting pots don’t have a clue what to do with them.

Amidst this chaos, the government has been forced to reconsider the messaging sent out by former chancellor of the exchequer, George Osborne, when in 2014, he announced at Budget that nobody would ever have to buy an annuity (pension) again. In a bid to simplify decisions, the FCA had to admit that DIY pensions aren’t happening as they should and have introduced ‘investment pathways’, down which those not choosing to purchase advice, can tread.

Meanwhile the Department of Work and Pensions, which has responsibility for company pension schemes, including the multi-employer master trusts used by many smaller companies, has gone further.

In the Pension Schemes Act, which received Royal Assent in February 2021, permission was granted to employers to set up pension schemes which paid pensions, not as a DB, but based on the amount of money in a big collective pot. These pots are known as collective defined contribution (CDC) pension schemes.

These pensions schemes do not require employers to make up any shortfall, rather the employer agrees to a defined contribution and these contributions are pooled to maximise investment returns and create mutual insurance for pensioners in the scheme. Necessarily, employers who wish to take on this kind of CDC need to be large and deep-pocketed. Royal Mail has led the way.

Guy Opperman, the pensions minister has announced that, in the autumn, he will be encouraging master trusts such as National Employment Savings Trust (NEST) and The People’s Pension to adopt the new collective approach and start paying pensions, rather than managing pots. Preliminary signs are that these large funds will relish the challenge.

Many people who claim to be pension experts are uncomfortable that AE pensions aren’t really pensions at all. And the funders of the large schemes are aware of the commercial need to continue to manage people’s money ‘to and through’ retirement.

They fear that increasingly large numbers of members, unclear about their options, will simply cash-out their pensions or use the ‘investment pathways’, rather than keep money in the trust. 

The CDC option is managing three key risks: it reduces poor decision making by members at retirement, it keeps money in the scheme and it ensures that pension investment can be intergenerational.

This final point plays well to the calls for ‘patient capital’ to fund the economic regeneration of Britain – what the prime minister is calling the ‘investment big bang’.

It is getting on for half a century since the introduction of the personal pension, since when we have seen a drift away from pensions to pots, from retirement income to wealth management. Could we be seeing the love affair with freedom and choice coming to an end? Could we be seeing pensions coming back in fashion? 


Featured in the October 2021 issue of Professional in Payroll, Pensions and Reward. Correct at time of publication.