Defined Contribution 

EU rules blamed for lack of pension income fix

EU rules blamed for lack of pension income fix

European regulation Solvency II could be hampering a possible solution for creating long-term retirement income for the mass market.

Solvency II requires insurance providers to keep enough capital to ensure the likelihood of being ruined during the year is no more than 1 in 200. 

This requirement, coupled with uncertainty around how long people are going to live, makes it too expensive for insurers to create a standard solution to the problem of providing the UK’s retirees with an income in later life, according to consultancy Aon Hewitt.

The comments came as the government and regulators are considering whether to introduce a default retirement solution for people not taking advice when going into drawdown.

Aon Hewitt pointed to a concept designed by the Australian government as part of its comprehensive retirement income review of 2016/17, which, it said, could function as a default solution.

The product would see people buy a deferred annuity towards the end of their working lives for when they reach age 85, while simultaneously starting to draw income as their regular earnings start to decrease from about age 65.

They would also have access to a flexible pot of cash for ad hoc withdrawals running alongside their plan.

Kevin Wesbroom, senior partner at Aon Hewitt, said a similar system could work in the UK.

But the problem was deferred annuities were too expensive because of the onerous regulatory requirements included in Solvency II on risk that could not be pooled, he said.

“If you buy a deferred annuity at age 65 that doesn’t kick in until you are 85 a lot of the people that buy those will be dead so that should mean buying that insurance is quite cheap. 

“The problem is given the uncertainty about how long people are going to live it’s possible that there will be a lot of people still alive at age 85. 

“The Solvency II one in 200 scenario is not that most people are dead but everyone is living. [It] kills off the price of deferred annuities.”

Mr Wesbroom said a way to go around the problem was to introduce collective defined contribution (CDC) schemes, which could pool the risk.

He said: “Deferred annuities don’t exist yet but they will do [if CDC legislation comes through].”

The government is currently looking at rewriting legislation to allow for CDCs, in an attempt to take the pressure off firms struggling to maintain defined benefit schemes.

CDCs are schemes that see an employer contribute the same each month but at the same time offers members a targeted payout after they retire.

Already used in Holland, they see risk shared among members, who typically come from across an industry rather than from a single employer.

MPs are keen to have some sort of default plan in place for those not getting advice but who do not want to pick their own investments in drawdown.