Over my working lifetime, the individualised savings (known as defined contribution (DC) or money purchase, more accurately, contribution-based) model where risk is passed to the individual, has become the main means of providing for later life. However, even if consumers understood the risks – which generally they don’t – it would still be an extremely inefficient means of organising retirement income.


A pension removes the risk of exhausting savings during retirement. It is a form of collective risk management and a brilliant financial innovation. Most people need pensions. Only having millions in the bank (because exhausting savings in your lifetime is unlikely) makes pensions become irrelevant. The power of pensions to transform lives cannot be overstated. Defined contribution (DC) equates to every household setting aside enough cash in the bank to meet rebuilding costs and replacing all contents. Since such a catastrophic loss is rare, insurance is more efficient.

A pension has elements of both insurance (by managing the risk of running out of savings during a lifetime) and savings (deferred income). The state pension is the most efficient means of organising retirement income because its compulsory nature ensures the widest possible coverage. There is no need for expensive marketing, for example. Funding is unnecessary because of the credit and good faith of the UK Government, saving on investment costs and taken with economies of scale, administration costs are low. Security is high because a sovereign Government with control of its currency and taxation can never go out of business. State pension rights can be protected against periods of absence for sickness, caring or unemployment. Having the widest possible range of life expectancies means that there is no problem of ‘selection against the provider’ where those with good prospects of longevity buy insurance.

Unfortunately, the UK state pension which should be the foundation of retirement income is the lowest among developed economies, following successive raids on the national insurance funding.

The inefficiencies of self-insuring retirement income are cogently set out by Tom Sgouras of the US Haas Institute (my emphasis):

“Isolated from a group, an individual employee must save for his or her maximum expected life expectancy, not merely for the average, as with a Defined Benefit (DB) plan… It is harder to reach the appropriate target, so fewer people will succeed, and the appropriate target is too high, so only the luckiest of the successful—the ones who both save enough and live their maximum life expectancy—will not be wasting money. It’s a problem, but from the perspective of efficiency, it is a very real waste of resources.”

Funding Public Pensions – Tom Sgouras Haas Institute

http://www.singernet.info/southwarktv/spag/spagNIFund.asp

The views shared in this article are personal views and not
those of the Money and Pensions Service.

By Ken MacIntyre, PMI Fellow, Money and Pensions Service Helpline Adviser


Regulating is like finding the right notch on your belt: go too tight and you can’t breathe; go too loose and it all falls down. In November, the Department of Work and Pensions (DWP) consulted on simplifying annual benefit statements. On top of two proposed regulatory amendments, it sought the industry’s preliminary views on: ‘how the use of simpler and more consistent annual pension benefit statements across the pensions industry through greater standardisation of structure, design and content could help improve engagement with pensions.’

‘Simpler’ suggests looser regulations, but the DWP are considering tightening regulations to make statements simpler. How’s this?


They believe providers litter statements with technicalities and disclaimers to cover their backs. The Confederation of British Industry acknowledges that providers have been “afraid to use layman’s terms as this might lead to non-compliance with the Regulator or Financial Conduct Authority (FCA)”. Anyone who has had to produce a Chair’s Statement can relate to this fear.

The proposals may be voluntary, at least to start with, but the DWP are disappointed at the numbers adopting the simple Defined Contribution (DC) benefit statement template launched in October 2018. That template may become compulsory. Alternatively, statements might need to meet a set of design principles, or meet detailed, specified ‘descriptors’.

In any case, the key information will be provided in no more than two A4 pages. The disclaimers, technicalities, and compliance statements will either be bumf stuffed in the envelope or shifted online.

A shorter statement containing only the fundamentals should increase engagement. Those other details are like Terms and Conditions; they’re important but will be increasingly ignored. Over time, regulators may become troubled by people not reading them. Providers may not be covered by disclaimers the Courts know their customers don’t see. Details may creep slowly back onto the statement.

Achieving ‘consistency’ requires tightening the belt; giving providers fewer choices. Consistency of presentation and message is desirable as it takes less conscious effort for people to follow. Once you understand one, you understand them all. Consider your bank statement. When was the last time you needed to check whether an amount was a debit, credit, or balance? You’ve understood how to read the table for years. However, the DWP also recognises the value of personalised communications. They are tailored to be more relevant and accessible for the target audience. This is often at odds with the aim to be consistent. Two different providers’ ideas for a personalised statement for the same individual could be markedly different. One size fits all, but is usually baggy.

One way to square this is to prescribe how providers can tailor their statements. The FCA did this with ‘retirement risk warnings’, but that is not an engagement success story so far.

If the DWP is too prescriptive here, innovation and creativity will be
stifled, which is counterproductive to increasing engagement with
pensions. We may start to hear about unintended consequences.
But right now, judging by current levels of engagement, perhaps the
belt is too loose. People are certainly looking the other way.

By Gareth Stears, Pension Technical Consultant, Aries Insight


Revealing the formula for improving pension outcomes and underlining the importance of quality communication. We’re in an era where data and machine learning is able to drive and improve our lives. This relies on the right choice and the right communication. The pensions dashboard, a target for retirement standards, and simple decisions to improve outcomes are very much possible.


As we kick-off a new decade it makes sense to look back at how far we’ve come, and what still needs to change, in the workplace pensions industry.

Most significantly, auto-enrolment (AE) has continued to move from strength to strength since it was introduced in 2012. More recently, in October 2019, the Pensions and Lifetime Savings Association (PLSA) successfully announced its retirement living standards, providing an all-important benchmark for savers to aim for when planning their future savings. Looking to the future, we hope we will see the introduction of the Pension Dashboard providing individuals, for the first time, with a comprehensive overview of each of their savings pots. These changes combined will allow consumers, fiduciaries, providers, Trustees and sponsoring employers to use data to guide members to a better outcome.

Getting more people saving

AE has been an undoubted success, with over 11 million people now in private Defined Contribution (DC) arrangements without the opt-out levels that were predicted. However, it’s clear that current contributions of 8% are still not enough for the vast majority of people to achieve the quality of retirement they imagine. We see that a minimum total contribution of 12% will be the first step toward a moderate income in retirement, but in time we anticipate that a minimum total contribution of 15% will be required. We also welcome self-employed individuals being part of automatic minimum contributions, recognising a target retirement living standard.

The retirement landscape of the UK has changed dramatically in the last 10 years. We have seen the population start to shift from being reliant on Defined Benefit (DB) schemes, to the newer generations entering the workforce that will only build up DC benefits. Many people are also now more likely than ever to build up multiple individual pots across different employers. As a result, many people have no idea where their benefits are let alone how much they are worth.

Better clarity of savings

The eagerly awaited introduction of the pensions dashboard aims to solve this by allowing everyone to access information about every aspect of their individual pension savings; state, private and personal. But this is just the start. The dashboard has the potential to offer so much more.

Having accurate information all in one place will enable the consumer to easily access their information and allow them to formulate a realistic savings target for retirement.

We must ask ourselves – how much money do we need to afford the lifestyle we want in retirement?

In an ideal world the dashboard will be able to predict the value of your savings at retirement and give assistance on ways to contribute more – ultimately leading to better outcomes. Eventually, we may also add other savings and accounts to allow one source of true personal net worth and how that impacts our decisions around retirement saving.

What does the industry need to do to make these changes succeed?

We need consumers and sponsors of pension arrangements to utilise and understand the retirement income targets. We need to use data accurately in order to provide options for the saver to make choices to reach their income targets. We no longer need to rely on guess work – we can be guided by technology to help us reach a retirement that we would expect.

Over the last 5 years, we have utilised our Guided Outcomes technology to provide pension savers with a target for retirement and options to improve their chances of reaching this target.

As we look ahead to future business planning, can we get the formula right with auto-enrolment, dashboard and targets to communicate better outcomes?

It’s so important that we communicate with members so they understand what pension savings they have and how much they need to save now to be ‘comfortable’ in retirement.

When using nudge-based communications we have seen more than 50% of members engage with the data and at least 20% of those do something which improves their chance of reaching a given retirement target. Equally beneficial to employers and Trustees, they can say they’re improving outcomes, and alongside wellbeing programmes, show their members are educated, engaged and empowered.

By Mike Ambery, Head of DC Provider Solutions, Hymans Robertson


Over the course of hundreds, perhaps thousands, of interviews with consumers, conducted over twenty plus years, we’ve learned a great deal about optimising communications. We’ve heard people from all walks of life, including pensions customers, share the good, the bad and the ugly. We’ve witnessed first-hand some very visceral reactions to bad communications, involving waste bins, shredders and even fire! So, if your comms suck, here’s how to make them better…


Start with the person

Too often we see communications that start with an inside-out view from the organisation rather than thinking about the audience, and even more importantly, the individual reader.

When we think of individuals, we often assume ‘personalisation’ is an effective approach. But personalisation is tricky to do, especially for pensions, and there are more sincere and simpler approaches that focus on how people engage with information.

We put a heavy burden on machines to know what people need and when, but there is still room for humans to write intuitively and empathetically. Communications that acknowledge the different needs of individuals will be rewarded with increased receptiveness. For example, signposting further resourcing for the person who needs/wants to go further are well received, as are attempts to condense information; an approach that is increasingly adopted by news outlets like the BBC who now regularly feature 300-word, 800-word or extended articles around key issues.

Admittedly, it’s easier to write a captivating news article than a financial document full of compliance and important-but-stuffy information, but taking note of how individuals absorb information is equally important in both communications. Much like how a bank manager would speak to a customer face-to-face, a letter should form part of a continuous, coherent conversation, taking into consideration an individual’s thoughts and feelings.

Starting with your individual reader means understanding the factors at play throughout the journey of the communication. We believe the best communications are produced when the process begins with insight into where and when people go through the following episodes.

Acknowledge episodic consumption

When we ask people about the journey a piece of communication might take around their home, computer or other device, we ask how (in what context) they consume communications – is it a manic Monday or a slow Sunday? This context affects whether people are willing to ‘lean in’ and think about finance, or whether the communication will have to wait for another day. When the information is more technical or complex – a perception, and often reality, of pensions communications – people revert to episodic consumption. By this we mean that people will start with a quick scan, picking out key messages (is this urgent, is there a deadline, what will happen if I do nothing, what is involved in doing something?) and then mentally categorise what is in front of them.

When dealing with literature or other printed communications, the mental process is matched by a physical one. People often take a conveyor belt approach: there is typically an ‘inbox’ in each home (this could be a shelf in the hall or the kitchen table) where the mail is placed, unopened. A sorting exercise takes place whereby mail is assessed at face value and quickly evaluated in terms of urgency and intrigue. In our experience, communications from financial services providers mainly fall into the ‘boring but necessary’, ‘unwelcome surprise’ or ‘ineffective selling’ categories!

This initial categorisation is important because it informs what happens next. For many people, there is a break here… and the communication will be opened with this initial assessment in mind. What is immediately communicated in an initial scan can reassure or activate negative emotions but it can also decide whether it needs further deliberation. Following review, opening and an initial cursory scan, there will be a ‘filing’ moment… where the communication will be placed somewhere ready for disposal, further review or filed for information. The review process may take multiple re-reads before deciding a course of action.

Encourage action

More often than not, we see misalignment between the intent of the messenger and the interpretation of the recipient. It’s important to recognise that for many people the communication is the start of another journey, and those next steps are often unappreciated in the communications they receive. The communication is a doorway or bridge to next steps for individuals, but is often treated as the end product instead.

This shouldn’t be ‘The End’. To aid the next steps of the journey you should invite the individual to get in contact or make an enquiry – and make this feel reasonable and normal. Too often the tone and structure of communications is overly formal, when it should actually read as if someone at your organisation were sat face-to-face with a customer.

Focusing on financial capabilities is important, but the context for a happy ending is much simpler; how much mental capacity do people have for your brand, your product, your ask of them? How do you best guide them to a positive outcome for themselves and their families? How do you reduce friction, remove barriers and open the door to action?

In order to create great communications that help individuals to live happily ever after, your organisation must recognise the flow of a communication; the context in which communications are received (physical and psychological); and that often your communication will start rather than end a process for recipients

By Paul Child, Lead Commercial Director, Peter Latham, Culture & Trends Consultant, Join the Dots InSites Consulting

We have a generation of people, fast approaching forty years of age, who do not own any property and have little or no pension provision. It is a social car crash waiting to happen and, if not addressed, will leave an entire generation facing poverty in old age with total reliance on the state.

This emerging challenge, on a social scale is, in my opinion, as great as that faced in the early 1940s which was addressed by the Beveridge Report and the establishment of the welfare state to combat poverty. It was a revolutionary moment; such a moment is now required in pensions.

I argue that the design of ‘wage in retirement’ occupational pension schemes running alongside one’s state pension is the only real way for millions of working people to have dignity and security in retirement. This was, of course, the gold standard for many years until a catalogue of deception from governments, unscrupulous insurance companies, and criminal or greedy employers devalued such expectation.

An example was the Maxwell scandal in the 1990s, the response to which was legislative and regulatory actions that have stacked the odds and the desire against occupational Defined Benefit (DB) schemes.

We have seen the closure of DB schemes at an alarming rate and a total lack of innovation in the pensions space; the only show in town has been Defined Contribution (DC) schemes.

This environment has arguably been a motivator for employers to move away from DB schemes and adequate pension provision in the interest of ‘fat cat’ salaries, increased profits and shareholder return, rather than tackle pension deficits or provide appropriate contributions.

Auto-enrolment and totally inadequate DC provisions may tick the box that says “do you provide a company pension?” but will disguise the fact that the outcomes from these provisions will be nowhere near adequate for a dignified retirement.

The pensions industry is walking on the other side of the road in regards to the end game of current provision; the promotion of DC schemes for a huge percentage of working people has passed the baton of responsibility to individuals totally unequipped to deal with it.

Of course, the other major threat to dignity and financial security in old age is the rise of casual and insecure employment; education and innovation is also desperately required in this area.

In the last two Queen’s speeches the Pensions Bill announced the opportunity to deliver Collective Defined Contribution (CDC) pension provision. Royal Mail Group and the Communication Workers Union will be at the forefront of that development having negotiated and designed a new DB/CDC scheme which is awaiting its introduction following the successful introduction of the Pensions Bill.

Faced with the seemingly impossible dilemma of circa 80,000 employees in a DB scheme facing complete closure, and 40,000 employees in a DC scheme which had not driven the right individual behaviours in regard to saving for old age, the negotiating landscape was ominous. However, with necessity being the mother of invention, a driving force emerged in the sometimes acrimonious climate, based on both parties seeking a consensus on what people need, or certainly the people we were both representing.

That consensus was a wage in retirement running alongside one’s state pension and the need to develop a scheme design that can honour the principles of traditional DB scheme whilst giving greater risk-sharing rather than placing the whole of that burden on the individual or the company.

With a renewed sense of purpose, and the help of a few brilliant experts, we began to develop the art of the possible and out of that emerged a new scheme. It is based on the design of a traditional DB scheme i.e. a lump sum at retirement based on 3/80th of pensionable pay plus increases (which is DB in nature), and a wage in retirement based on 1/80th of pensionable pay plus increases. The design seeks to achieve the same outcomes as the DB scheme which was facing complete closure.

The shared risk element is the fact that the outcomes are not guaranteed and can be subjected to cuts on the journey. However, the very robust modelling for the investment strategy going back to 1925 shows great reason for optimism with only two potential cuts in 1932 and 1933 during the Great Depression. Equally though, the scheme would not have to close at any time during that period, would achieve its targeted outcomes, and would hugely out perform, thus providing far greater value for money than DC provision.

By Terry Pullinger, Deputy Secretary Postal, CWU


As defined benefit schemes mature, trustees are increasingly turning their attention to the endgame and how their scheme will service its liabilities over the long term. In many cases, this involves targeting a particular funding level sometime in the future through a combination of asset returns and deficit repair contributions.


In order to maximise the certainty of reaching their target funding level, schemes must do three things well:

1. Protect themselves against the liability-related risks that could knock them off-course

2. Generate sufficient growth to reduce any deficit

3. Manage liquidity requirements to ensure they can cover outflows without being a forced-seller of assets

In relation to the first of these points, many schemes will already have in place Liability Driven Investment (LDI) strategies that mitigate their liability-related interest rate and inflation risks. However, few schemes will have in place any protection against the longevity risk inherent in their liabilities. As a result, many schemes are exposed to the impact of changes in life expectancy during the period before reaching their endgame.

Introducing unfunded longevity hedges

One approach for schemes looking to hedge themselves against the potential impact of longevity risk, while retaining control over all of their assets, is to implement an unfunded longevity hedge (commonly referred to as a longevity swap). An unfunded longevity hedge transfers the risk of pension scheme members living longer than expected from the pension scheme to an insurer. Figure 1 provides an overview of how an unfunded longevity hedge works

What happens to the unfunded longevity hedge when you achieve your endgame?

For any scheme considering an unfunded longevity hedge, an important question to ask is how might this affect my future plans? In particular, many schemes are targeting buy-out as their endgame, in which case there will inevitably come a time at which they wish to buy-out the members covered by the unfunded longevity hedge.

In this scenario, the two primary options are to either terminate or novate the unfunded longevity hedge. In the case of termination, the value of the unfunded longevity hedge would remain with the in-the-money party, but the scheme would almost certainly be required to pay a potentially significant termination fee. An increasingly viable alternative to termination is novation. In this scenario the unfunded longevity hedge insurer drops away, but the longevity reinsurer remains and instead contracts with the buy-out insurer. Under this approach, the portion of the buy-out relating to the unfunded longevity hedge is priced using the longevity assumptions underlying the original unfunded longevity hedge, meaning that the scheme has been able to lock into an element of buy-out pricing many years ahead of the actual buy-out, thereby reducing the risk associated with targeting buy-out as the endgame.

As novation of unfunded longevity hedges becomes more commonplace, we anticipate that they will increasingly be seen as a stepping stone towards a buy-out.

Given this, at Insight we believe longevity hedging can help pension schemes to evolve their LDI strategy, which will in turn increase the certainty of reaching their endgame.

Key steps in the implementation of an unfunded longevity hedge

There are a number of steps that schemes must carry out when implementing an unfunded longevity hedge, many of which are similar to those needed when considering an insurance buy-in.

1. Feasibility study

An initial feasibility study should be carried out in order to understand:

• Which liabilities should be covered by the unfunded longevity hedge

• The potential cost of the unfunded longevity hedge

• The impact of the unfunded longevity hedge in terms of the risk that it removes

2. Intermediation approach

The scheme must decide whether it will transact with the longevity reinsurer through either a UK-domiciled insurer or an off-shore insurer; both approaches have successfully been used by UK pension schemes.

3. Data preparation When the reinsurers are approached for a detailed quotation, they will want to receive member-level information for both in-force and historic scheme members. The preparation of this data could represent a significant amount of work and should therefore be started as early as possible.

4. Reinsurance brokerage

Pricing and key terms must be negotiated with potential reinsurers, with several rounds of bidding taking place before one or more reinsurers are selected for the transaction.

5. Transaction documentation

Once the reinsurer(s) has been selected, the transaction must be fully documented. This process will involve lawyers and advisors acting for all of the key stakeholders.

6. Ancillary services

In order to support the longevity transaction on an ongoing basis, the scheme will need to make the following appointments, all of which can be provided by a single third party:

• Calculation agent: Calculates the payments to be exchanged during the life of the transaction (i.e. net cashflows and collateral requirements).

• Valuation agent: Values the assets currently posted as collateral.

• Collateral manager: Moves collateral assets as required on behalf of the scheme.

Risk Disclosures

investment in any strategy involves a risk of loss which may partly be due to exchange rate fluctuations. Unless otherwise attributed the views and opinions expressed are those of Insight Investment at the time of publication and are subject to change. This document may not be used for the purposes of an offer or solicitation to anyone in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it is unlawful to make such offer or solicitation. Insight does not provide tax or legal advice to its clients and all investors are strongly urged to seek professional advice regarding any potential strategy or investment

Howard Kearns

Longevity Pricing Director, Insight Investment