Beep! Another piece of analysis lands in the email box on how the withdrawal of the requirement to buy an annuity will affect the pensions industry. With each email, the complexity of one seemingly simple change in pension policy mushrooms further.
Trying to get one handle on all the different ramifications for every stakeholder in the pensions industry is a truly headache-inducing exercise. The changes have implications for scheme members, investment consultants, asset managers, trustees and regulators.
Grappling with all the angles and issues reminds me of a great quote by the late Nobel Laureate, Richard Feynman: “If you think you understand quantum mechanics, you don’t understand quantum mechanics.”
While I’m not suggesting the pension policy is quite as complex as quantum mechanics, the government decision to open up the at-retirement market certainly throws up a bewildering slew of questions.
To name a few: What kind of products do scheme members want to replace annuities? How can asset managers ensure scheme members won’t run out of money before they die? How do trustees feel about now having to provide not only pension savings but also at-retirement income?
And the questions are not just about what the pension products of the future will look like, they are also about how to re-shape the existing pension provisions.
Many DC scheme members save into a default fund which is mechanistically switched into fixed income assets five to 10 years before retirement. This was done to preserve capital value and match annuity pricing. But if scheme members no longer have to buy annuities, this is a best a futile exercise, and at worst one that could erode capital value.
Now the industry needs to re-evaluate what kind of funds pension schemes should be using in the years in the run up to retirement. And what about members who are close to retirement and have had most of their asset switched into fixed assets? Should the switching continue?
Along with the government announcing that it would no longer require scheme members to purchase annuities, it also said that schemes would have to ‘provide fair and impartial’ advice at retirement. But many in the industry have already pointed out that at-retirement advice is five to 10 years too late if assets have already been switched.
I could well understand if trustees would prefer to be in the bottom of a gold mine in South Dakota. A quantum mechanic appears to have a better chance of finding dark matter than a trustee has of twisting the latest government policy into a workable DC pension solution.