This blog is one in a series of blogs on the Future of Ageing, published in the lead up to the ILC-UK Future of Ageing conference on the 24th November. To register to attend this conference, click here.
I am going to start with a prediction:
“Retirement as we know it, will die off with the Defined Benefit pensions that financed it”
That’s the easy one out the way; I’ll spend the rest of the time working out why; what might replace it; and what we can learn from this, both now from a policy viewpoint and later from a societal viewpoint.
The Policy Perspective
If I landed on the planet as an objective alien, and sometimes I feel like one, I’d conclude we struggle so hard to protect consumers from risks that we end up exposing them to far greater risks. It’s a bit like putting someone in an airtight jar to protect them from death by airborne germs, highly effective against airborne germs but ultimately unlikely to deliver better outcomes than allowing them to catch the odd cold!
Defined Benefit (DB) Pensions were a great idea and they worked; but few remember they started out as best endeavors, not a guarantee. Then someone worried that a pensioner might get a shock if the pension didn’t deliver what is was endeavoring to, so it became a legal guarantee. This ultimately led to the DB schemes (pooled investment schemes which in many cases lacked the capital to meet those guarantees) being closed. They did so because the sponsors of DB Pension schemes concluded that the role of a business is primarily to be a business, and not a pension life-support system. In short they preferred their current business to becoming an insurer by stealth. As a consequence, the pensioner is now taking all the investment and longevity risk. Ironically to protect Pensioners the Government took actions which led to pension schemes, which took the vast majority of the longevity and asset risk, being closed and all of the risks being transferred to the Pensioner. To protect them from a minor secondary exposure we made sure they had the full primary exposure!
The cycle has been repeated (With Profits, Annuitisation), and I think points to where we are heading from a policy perspective. I think of it as almost always the result of a coming together of two features:
- A Government or Regulator looking to solve a narrow problem without regard to the wider context. Asked to ensure savers never lost out in a DB scheme, one valid solution is having no DB schemes.
- The cult of individualism. If you can get comfortable with the statement “it will be OK because the individual is always best placed to make the best decisions for themselves” you should fully support individualism as a solution in complex financial markets even though the individual will (typically) have very little expertise. If not it needs more challenging scrutiny.
Winners and Losers
So who does well from individualism? Generally it’s always those who can afford to pay for the expert advice needed. The wealthy will continue to accumulate material wealth, far less of it in pensions given lifetime limits and reduced contribution caps, but probably more in ISAs, Property and other assets. They will work longer if they choose, they will be well advised and blend voluntary annuities with other assets to create an optimal advised portfolio and worry about Inheritance tax rather than grocery bills.
The less wealthy will work longer, by necessity. For some it will be because we, as a nation, are chronically under-saved for later life. For others it will be because they spent their pension too quickly (or worse still were scammed). This will create real challenges for those whose health is deteriorating, and for employers: older employees who remain engaged and committed can be a real asset, those working beyond a natural age by necessity may be less so.
The Cult of Individualism delivers worse outcomes on average than the pooling of assets to manage risks, this has been studied many times by academics so I don’t feel the need to make the case.
The most vulnerable members of society are left most exposed, and we as a society have a responsibility to deliver better options for them.
The “Freedom and Choice” agenda in public policy isn’t necessarily a bad thing in itself, but freedom requires the legal ability to act and the knowledge to understand the decisions – without the latter there is no freedom, only the illusion of freedom and the real risk of worse outcomes.
However, failure of financial systems to deliver poor outcomes for the weakest in our societies or to provide the protections that consumers need, need not be inevitable. I am not alone in believing that the only way to deliver sustainable, positive outcomes for people in retirement is to ensure that the interests of business, policy makers and consumers are aligned. These key stakeholders now need to develop a meaningful relationship and develop the structures which can resist short term decision making and address the significant demographic, intergenerational and fiscal issues facing not only our country, but every advanced economy.”
Chief Executive, Partnership