I managed to spend a bit of quality time last week reading a wonderful book called The Universe versus Alex Woods by Gavin Extence.
It is a must-read: it was recommended by a financial adviser friend of mine, so it must be good.
It was also recommended last year by the Richard and Judy Bookclub. I know, I am a year behind in my reading and should be hurtling through Helen Dunmore’s The Lie (on Richard and Judy’s list of 2014 summer reads), but as always I am submerged in a sea of financial services press releases and emails. So little time for pleasure.
Back to The Universe versus Alex Woods. In the book, central character Alex estimates the odds of being hit by two meteors in one lifetime (he has already been hit once) as one in four quintillion, or as he says: one in “a four with 18 zeroes after it”.
“Quintillion” is the word I would use to quantify the number of changes made to pensions in recent years“Quintillion” is the word I would use to quantify the number of changes made to pensions in recent years. Indeed, I find it increasingly hard to keep up with all the new rules and regulations, most of which have been launched by the incumbent pensions minister Steve Webb.
Anyway, the latest of the quintillion changes was announced last week when the Queen, as part of her 2014 Queen’s Speech, outlined the Coalition Government’s commitment to bring before parliament a Private Pensions Bill, paving the way for new, defined ambition pension plans. Or collective defined contribution plans, as some refer to them.
Even Steve Bee, the font of all pensions knowledge, was left rather bamboozled by yet another proposed change to pensions, proclaiming: “Our pensions system is already mind-bogglingly complex. Adding another different and alien strain to pensions to the two we already have, will surely add to the problems ordinary people already have when they try to get their heads around pensions.”
Well said that man, who has set up a company post Scottish Life called Jargonfree Benefits, with the aim of helping SMEs deal with the requirements of pensions auto-enrolment.
Riskwise, defined ambition will sit somewhere between defined benefit and defined contribution plans. It will offer none of the guarantees that make defined benefit schemes “de luxe” for pensioners (and increasingly unaffordable for employers), but will provide the opportunity to generate a -bigger pension than is normally available under a traditional defined contribution plan (primarily from lower charges and greater investment opportunities).
Information on the proposed legislation was leaked to the Press prior to the Queen’s Speech, so the pensions world was hardly taken by surprise.
It has also long been known that Mr Webb has been keen to bring defined ambition to market.
I was first made aware of collective defined contribution pensions (defined ambition) a couple of years ago, when I was invited to attend a press conference at the Royal Society of Arts in London. The event was to mark the publication of a report into collective pensions by David Pitt-Watson, a man who made his fame at Hermes Fund Managers.
Mr Pitt-Watson’s report made compelling reading, as it detailed the 37 per cent improvement that could be achieved from investing in a collective defined contribution scheme over and above a traditional individual defined contribution plan. This, he argued, would result from a mix of lower pension charges (brought about by economies of scale), more investment opportunities and the fact there would be no requirement to annuitise (because pensions under a collective arrangement are paid out of the amassed pension pot).
At the time I was impressed, albeit a little bamboozled, but Mr Pitt-Watson was not for sitting on his hands. Late last year, he followed up his July 2012 work with another report, providing yet more evidence in support of collective pensions. This time he presented information from pension consultants Aon Hewitt, which confirmed that over 57 rolling 25-year periods starting in 1930 and finishing in 1986, a collective defined contribution scheme would have produced on average a pension equal to 28 per cent of final salary. An equivalent individual defined contribution plan would have delivered a pension equivalent to 21 per cent of final salary. This would be for someone contributing to a pension from the age of 40 for 25 years and investing 10 per of their salary.
Introducing these findings, Mr Pitt-Watson said: “British people should be allowed to save for retirement through collective pensions, just like people in Holland, Denmark, parts of the US, Canada and Sweden.”
Well, with last week’s announcement, it now looks as if Mr Pitt-Watson is going to get his wish.
Will the arrival of defined ambition pensions actually deliver better outcomes for pensioners? That is the 64 quintillion dollar question – and certainly opinion is divided.
Since Mr Pitt-Watson’s work, collective defined contribution schemes in Holland have been cutting income for those in retirement. Many in Holland now crave the individual defined contribution schemes that dominate our pensions landscape.
Also, as outlined in the Queen’s Speech, we now have the prospect of a Pensions Tax Bill passing through parliament that will remove many of the restrictions governing the way individuals can access their defined contribution pension savings.
If this Bill is passed, it means the estimated 37 per cent improvement from collective pensions will be greatly reduced. This is because defined contribution members will not have the “cost” of annuitisation, which Mr Pitt-Watson in his 2012 study said accounted for 22 per cent of the 37 per cent.
If only pensions were simple and not overwhelmed by a quintillion rules.
Jeff Prestridge is personal finance editor of the Mail on Sunday
