DC Risk sharing aux etats de Jersey

États de Jersey and arms on the original termi...

Image via Wikipedia


A year ago I wrote of the NAPF 2010 gig as our train departed Lime Street. I’m writing as my train pulls out of Piccadilly-Joanne may be aboard. I hope she’s not bought another first class ticket as this train has been declassified and she’s not going to get that vacant seat anytime before Euston.

 Looking at the photo I took that afternoon (above), I’m reminded f just what a spectacular conference her organisation pulls off year in year out.

This year I and my colleagues decided we could not justify the impact of the cost of attendance on client fees . Nonetheless a few of us were in Manchester and the feedback I get from delegates ( by twitter and everyday conversation) is that this was every bit as good as last year’s. I hope our clients are grateful!

A recurring theme appears to have been a new focus on the plight of the DC annuitant. It was great to hear that there were questions in many sessions about why the OMO wasn’t better used, worries about impaired annuities but best of all Stevie Webb Webb Webb made an unequivocal statement that he would be investigating risk-sharing to provide more certain DC outcomes.

Jo took this to mean a smoother investment track (the holy grail of the diversifiers) but Steve seemed to be thinking more radically. He has Holland on his mind …and the efficiencies of collective decumulation where retirees create a mutual fund of their own.

Talking about this this morning with Derek Benfield, possibly the person who has thought more about this than any person on the planet, we strayed into an area where hidden  elephants abound. He looked at me as he does and stated placidly.

I would be interested in asking a serious pension lawyer  whether an actuary can unilaterally and universally reduce a scheme pension in payment.

Such a simple idea that it took me a few moments to grasp it. What Derek is asking is whether the person responsible for the solvency of people’s pensions can, when he thinks it sensible,cut the year on year pension – just like that.

It’s something of a sacred cow among pension people that in terms of pension payments, what goes up can’t come down and the majority of pension schemes have it written into their rules that pensions are guaranteed in this way.

But Derek’s question goes beyond this legal nicety, he’s saying supposing I set up a defined benefit pension today with no rules, could I give myself the right to give people a pension pay cut from time to time. He doesn’t know – I don’t know but if you could – how cool could that be?

I’ve always seen the most sensible pension scheme in the UK as that run by the people of Jersey for their public servants. As just about everyone in Jersey works for the “States” at some point in their lives and to be a “crapaud” (Jerseyman) means giving up your life to live on the rock of the south, it’s fair to say that the States pension is Jersey’s pension. A few years ago the pension found itself in severe deficit and for this generation of Crapauds to guarantee the next generation of Crapauds that their money wouldn’t run out would have meant a hike in corporate contributions to over 20% of payroll. This would have imperilled the tax privileges of the uber-rich which is the only reason anyone would want to go and work there in the first place.

So the States decided to convert their scheme to DC. Not the DC that you and I know but a form of collective DC that works like this. The States stick at a 16% contribution for their staff for the next 84 years (the notional period a clever actuary predicts it will take to recover solvency!!!). Meanwhile the States continues to pay out full pensions in line with the Defined Benefit Promise (regardless of the day to day solvency of the Scheme). If the money runs short, a decision will be taken on who won’t get the full promise but that decision will be taken by everyone in the Scheme – in other words all the Crapauds.

What Derick’s saying is that the Scheme Actuary of a scheme like the States of Jersey could take it upon himself to set the pension for each year on the basis of what was affordable and cut out any bickering between the differing groups,

This has profound implications for the way that scheme pensions are governed. It’s well worth Stevie taking the Flybe to Jersey and not to Amsterdam. The Dutch are screwing up a perfectly sensible pension system as they become more and more hung up on the guarantees. Each time they try to reinforce the guarantees they make their schemes more complicated. Eventually they will become so complicated that they will all close down like the ones in mainland UK.

This really brings me to the la Grande Dame of collective insurance -Con Keating who, were he reading this, would point out that the only effective guarantee is that you’ll treat each other fairly (the Jersey way). If you accept this then your only worthwhile investment is in ensuring that the guarantee is maintained. In the corporate world this means insuring against the organisation paying the pension going bust. In Jersey I guess it means that everyone pensioners, former employees and current members has an active interest in the management of the scheme – all have much to lose even if the pension scheme ahs been immunised from bankrupting the taxpayer.

I guess where this is leading is towards a new way of looking at pensions and it probably leans more towards’ Con’s vision than to the system of individual annuitisation that is being exposed as entirely inadequate for the mass-market.

For every guarantee there is a risk and without guarantees there is differing risk. Ultimately we need people with level heads like Derek Benstead to assess the liabilities, look at the risks and direct us to take sensible decisions. After a couple of years working for First Actuarial- I’m beginning to get it!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in annuity, EU Solvency II, mallowstreet, pension playpen, Retirement, Salford Quays, Treasury and tagged , , , , , , , . Bookmark the permalink.

14 Responses to DC Risk sharing aux etats de Jersey

  1. Excellent article. The fact that interests me most is when you state that Jersey has managed to get everyone to take an active interest in their pension. This seems to me the biggest issue and one that auto-enrolment discussions generally duck. In fact, auto-enrolment seems to be trying to sleepwalk people into saving for their pensions and this may not engage them enough. So the initial figures may be ok but as soon as the first round of annual statements come in, we may well say a second wave of departures from the schemes as people realise just how much they will have to contribute to get a meaningful pension amount. Without getting people to actively choose to participate, we run the risk of the initial figures proving to be a mirage.

  2. Pingback: Sexy cash for pensions – Politician nearly loses his patience « Henrytapper's Blog

  3. henry tapper says:

    Thanks Tom. You’re right because these DC pensions need people to understadn what’s going on. The obvious alternative is to bosst the Basic State Pension which doesn’t require any involvement.

    The thing that puzzles me is why we want people to be involved in taking decisions on pensions ar all – most people are more than happy to leave things to “trusted others”.

    The answer of course is that there is nog enough money in the taxation system so we have to involve the uninterested through auto-enrolment. Just because they are saving, doesn’t mean problem solved.

  4. Pingback: Will the Big Society sort pensions? « Henrytapper's Blog

  5. Pingback: Rising to Beecroft’s challenge- can we make pensions work for micro-employers? « Henrytapper's Blog

  6. Pingback: Perverse incentives; Sexycash or prudent pension? « Henrytapper's Blog

  7. Pingback: Unexpected risks – people just don’t get pensions (education). « Henrytapper's Blog

  8. Pingback: ABI and the OMO- guest blog by Alan Higham « Henrytapper's Blog

  9. Pingback: Sorting the pensions of the “squeezed middle”. « Henrytapper's Blog

  10. Pingback: Can we have a word Mr Webb? « Henrytapper's Blog

  11. Pingback: Who chose those guarantees for you? « Henrytapper's Blog

  12. Pingback: To get better pensions we need to share risk « Henrytapper's Blog

  13. Pingback: Aspirational (popcorn) pensions- bigup for Steve Webb’s pragmatic way forward | Henrytapper's Blog

  14. Pingback: Aspirational pensions – popcorn pensions!! | Henrytapper's Blog

Leave a Reply