10th December 2013

What makes a good pension?

Legal & General played host at our London head office recently to a debate on the topic of “what makes a good pension?” organised by The-Pensions-Net-Work. As is sometimes the way with these events, we enjoyed a mixture of the predictable rationalisations of behaviour and some enlightening new insights.

Things we’ve heard before included this short list, in order of importance:
1. Pay large enough contributions
2. Invest them well
3. Choose a plan with low charges                         

That’s good solid advice; even though in my view regulators and so called “consumer champions” sometimes get these the wrong way round. They tend to place too much emphasis on charges and forget that adequate contributions are the biggest driver of good outcomes.

GOVERNANCE
Interestingly another familiar concept appeared to feature at rather greater frequency than I’d heard before; that of governance. Several contributors stressed the need for pension schemes to have strong active governance, keeping the managers focussed on delivering what really matters to the beneficiaries. Nobody produced a magic bullet for what good governance meant, but the clarion call was there - every day we need to focus on what matters to the end customer.
It didn’t seem to matter whether the scheme was written under trust or as a contract based arrangement. Strong governance focussing on good outcomes is going to be key going forward.

ANNUITIES
And talking of outcomes, that will mean buying an annuity for most retirees. One speaker presented us with a new take on a piece of established wisdom on annuities. Those of us that sell lots of annuities know that, where the customer has a choice, most buy a level single life annuity with no provision for their spouse or civil partner after their death. And I for one have always believed that it was the simple rationale of extracting the maximum income in early years from an inadequate pension pot that drove this behaviour.                         

Research from a major annuity broker has shown that 40% of men asking to buy a single life annuity don’t even know that such a thing as a joint life pension is available! That’s a wake up call to all of us to re-double our efforts on customer communication and education, especially in that important pre-retirement period.
                       
CONSUMER RESEARCH
The-Pensions-Net-Work had also commissioned some new consumer research into savings preferences. A familiar comment (or should I say excuse) is that two thirds of those interviewed said they would be relying, at least in part, on their property in retirement. Yes, that old British love story with bricks and mortar.                        

But the researchers had posed a supplementary question “and how will you generate money from your house?” Amazingly, four in every hundred think that they are going to take in a lodger in their retirement years. I wonder how many years ago it was that they last shared accommodation with strangers? It’s charming how the passing years play tricks with our memories and leave us just remembering only the fun parts of those earlier care-free days, rather than the reality of a sink full of someone else’s dirty dishes.                         

Take my advice, the short cut to a good pension is paying larger contributions!
 
ADRIAN BOULDING
PENSIONS STRATEGY DIRECTOR, LEGAL & GENERAL

Pensions