Collective pensions – what the industry thinks

collectiveMallowstreet, the “poshbird” of pension websites has done a deal with the FT where its contributors write an article for the journo (in this case the wondrous J Cumbo).

I’m all for this kind of “vox pop” and perhaps the wondrous J Cumbo might like to do the same with some of our LinkedIn threads on our linkedin pension group

If you don’t move in the elevated circles that give you access to mallowstreet- you can now share in the wisdom of their crowd – provided you pay for your FT or you have (like me) a friendly mallowstreet editor who shares this stuff!

By Josephine Cumbo

News that the government is exploring a new collective approach to pension saving to boost income for millions of retirement savers in the UK has prompted much debate.

The FT revealed this week that the coalition is drawing up proposals for a radical reshaping of the private pensions industry under which “big, household-name” companies would come together to create a “pooled fund” which could ensure a more generous income in retirement.

This new approach, known as collective defined contribution (CDC) would be a departure from the defined benefit and defined contribution models which dominate pension saving in the UK.

The main attraction of CDC, already used in the Netherlands, would be size – a large, pooled fund, where risk is shared between members and allows economies of scale that could substantially lower charges.

We asked members of Mallowstreet.com, an online discussion forum for the pension industry, whether a collective approach could work in the UK. Here’s a selection of their views:

Michael Clark, of Clark Benefit Consulting: “I’m normally nervous about the ‘big is better argument’ but in terms of members in defined contribution schemes, for both the accumulation of funds and the eventual provision of income from the fund, the evidence suggests that bulk purchasing power pays off.

“Investment choices can be more wide ranging, gaining access to markets that may not be available to smaller funds. Investment costs should certainly be driven down, which should go straight to the bottom line to help individuals accumulate a bigger pension saving pot.”

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Kevin Westbroom of Aon Hewitt: “It is very easy to knock CDC – but not so easy to come up with a better system. At its heart I think is a challenge to us in the pensions industry – have we done the best we can for members? CDC . . . relies on sharing between members – no employer underpins or guarantees [a pension].

“And yes there could well be times when it ‘fails’ – we need to be clear what that means and [ensure that] the modelling we have carried out suggests that failure can be restricted. Do other systems fail? I think that DC could be argued to have failed, if it forces members to buy overpriced annuities, and endure suboptimal investment strategies.

“DB failures [the closure of defined benefit schemes] means that members are pushed into DC – or at worst the cost of the pension forces the employer to fail and members get reduced PPF benefits. So feel free to knock CDC – but tell me your better ideas please!”

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Simon Wasserman of PwC: “The fundamental question is how we manage risk to boost incomes for pensioners compared to these individuals’ expectations. Final salary is one extreme, where risks are spread across members and across time – while DC is the opposite – here the risk is concentrated with individuals at a point, or points, in time.

“To find the best solution we need to identify and encourage alternatives which allow that risk to be spread. The difficulty has been that legislation treats anything that is not pure DC as being subject to the extra costs and constraints of being a fully DB plan. CDC spreads risk across people, but not really across time.

“It is clear that we need a middle road with adaptable and flexible solutions. But it would be unfortunate if we legislate to provide for particular structures when the need is to legislate in terms of outcomes. Solutions which provide a balance of where risk resides should be treated, in legislation, as halfway between DC and DB.

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Henry Tapper of First Actuarial: “CDC looks like a defined benefit plan without the guarantees. Surely any employer – through a multi-employer scheme, or single employers if big and tough enough – should be able to run a pension scheme for staff without the obligations that DB plans have today. Defined ambition as we saw it was a way for committed employers to do more than they can with DC without mortgaging the balance sheet.”

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Stephen Budge of KPMG: “DC remains a fantastic concept. It works beautifully well in that members know exactly how much money they have in their pension plan at any one time and their employer is safe in the knowledge that they don’t have a potential grenade on their balance sheets. The members’ savings are their own, and the member can save as much or as little into their pension as they wish. It is transparent, flexible and low cost.

“Yes there are areas of improvement due to the changing needs of how employees will retire in the future but the concept works and is working in a number of countries such as Australia and the US as the main pension savings vehicle.

“I agree that in the vast majority of cases, ‘bigger is better’ and that is likely to be the key change we see in the UK market over the coming years; collective groups of DC schemes in the form of large master trusts. But a move to CDC seems an unnecessary and potentially dangerous step for the pensions market. Let’s collectively support DC.”

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Bobby Riddaway of Capita Employee Benefits: “The concept of collective DC is easy to support. However, many other concepts are also this easy to support, for example, with-profits – sharing and smoothing out equity risk, or stakeholder pensions – giving access to low earners, loans for small business – giving banks support to loan to small business. The devil is, as always, in the detail and how practically to make it work.

“Whilst many employers are struggling to set up fit-for-purpose DC schemes, to cope with auto enrolment, the big issue has not been properly addressed and collective DC could go a big way to addressing it if supported correctly and funded correctly.”

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Maddi Forrester, Axa Investment Managers: “In the UK specifically, our sponsored research with EDHEC concluded that the current hybrid model should be adapted to a collective system to benefit from greater risk sharing, economies of scale and better risk management. However they also warned against replicating the Dutch model without reviewing the type of regulations and governance that will manage them as short term prudential and accounting constraints can override the long-term nature of pension funds.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Collective pensions – what the industry thinks

  1. Hi Henry,
    Just to clear up a few points made in your blog. As you must know, the FT does not do “deals”
    for articles. The views of Mallowstreet contributors were sought as they are less widely
    heard on other social media ( apart from yourself ). If you ask me I think the piece has widened the debate.
    If you are interested in reading the views of Twitter / Linkedin regulars on collective pensions
    you can read this FT story http://on.ft.com/1anUiwV
    I am very open to using Linkedin for these kind of discussions and will do so in future.
    Yours,
    (the ever wondrous)
    Josephine Cumbo

  2. henry tapper says:

    Your luminosity has just intensified Josephine!

  3. Mike Atkin says:

    Nice to see one or two coming round to my way of thinking. At last we are realising that neither DB or DC is fit for purpose in todays environment and that the Financial Services Industry is likewise. You guys need to sort it out before somebody does it for you.

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