The designers of the UK’s new personal accounts, the national pension scheme to be rolled out from 2012, have a great opportunity to shape the way pensions are delivered in future. They could challenge the pensions industry to come up with new ideas and indulge in blue sky thinking.
Or they could stick with standard industry products and hope they work. That seems to be the preferred approach of the respondents to the Personal Accounts Delivery Authority’s consultation on how to provide retirement income.
There is general agreement that lifetime annuities are the most appropriate means of delivering retirement income to personal account savers. At least in the early years, most savers will have small pension pots that would not be suitable for other options, such as drawdown.
That sounds reasonable – annuities have been around for a long time and remove the risk of outliving your savings.
Who provides the annuities, and how, is more complicated. Pada does not want to enter the annuity business as it does not want to take on the long-term obligations and longevity risk it would entail. It wants to hand over savers to insurers once they reach retirement age. It has proposed a provider panel for people unwilling to shop around for themselves, although it is not committed to this idea. Tim Jones, chief executive of Pada, told me in March, when he came in to the FT to record a video interview, that his preference was for a really low cost open market option for all savers.
Judging by the responses, this is not viewed as a viable approach. Pada reports that annuity providers think more choice is better, while others think simplicity is important and suggest there should be a default annuity before age 75.
It is worth delving down into the individual responses. One interesting idea, from Barclays Global Investors, is to take a more joined-up approach so that annuitisation is not a point-in-time purchase (this is in reponse to the proposed default annuity at age 75). Savers would gradually buy income units that convert to annuities at a set age if they do not make a decision themselves – similar to a deferred annuity.
This makes sense. The one-off nature of annuity purchase is one of the big drawbacks of the existing system. There must be a better way of managing money than to build up a lump sum then hand it all over to one insurer regardless of whether it is a good or bad time to buy an annuity.
For a critique of annuities (and the private provision of same), the response (more of a rant really) from Stephen Wynn is worth a read.
Let’s hope Pada does some thinking of its own and comes up with an approach designed to give savers the best chance of maximising their retirement income without taking unnecessary risks – preferably something that throws the industry into a fizz of indignation and annoyance and forces it to provide real value for money.