Why Steve Webb took a punt on CDC

IMG_4743

To answer the question we need to understand the Government’s primary agenda; – to “win votes”. A secondary agenda is to “create a legacy by which it will be judged favourably”. If you are charitable, you might include a third agenda, “to make a lasting difference to the welfare of the citizens”.

For Steve Webb, the prospect of 2015 is interesting. While his party has suffered (as all predicted it would), he is probably the most successful of Liberal Ministers within the coalition at driving through his agenda, achieving popularity within and without his department and operating smartly.

Not for Steve, the risks of question-time and of the populist politics that have brought down many of his colleagues. He sticks to the knitting. Webb has not been overly partisan in his approach and has thus maintained the support of his Tory boss (Ian Duncan Smith) and the coalition as a whole. Even the Treasury seem to respect him- a long-time since any DWP minister has got that

On the face of it, the introduction of CDC, at this late stage of the parliamentary term appears an uncharacteristic risk for Webb. As auto-enrolment was for him, so CDC will be for whoever takes on the pensions brief in 2015- unfinished business.

But whereas auto-enrolment was readily understandable as a means of including the great pensions unwashed, CDC’s purpose is harder for the public to understand. Relative to the relaxation of rules on annuities in the Budget, it has not exactly grabbed the popular vote!

Is CDC a political risk?

Certainly CDC will not re-ignite the liberal party!

But I don’t think Webb is playing to the primary agenda (he has done his bit by cheekily  taking the credit for the Budget ).

I think Webb is thinking much more about establishing his legacy and maybe he is actually trying to do something to restore the long-term credibility of “pensions”.

This, in “political” terms, is why Webb introducing CDC.

 

What’s it for?

Of course he doesn’t get the Queen to call it that- she has to talk about Defined Ambition but DA is CDC and in the detail, CDC is about three things;

  1. Introducing an alternative to annuities that plugs a market gap (there is no mass market alternative for DC savers at present
  2. Protecting consumers from inappropriate products- Webb has repeatedly said he does not want to see retail solutions solving institutional issues (and he’s pointing a finger at advisory drawdown).
  3. Offering an opportunity for some defined benefit schemes to take risk from their sponsor’s balance sheets.

Webb likes to talk about the project as “Defined Ambition”. Items (1) and (2) are not (politically) ambitious; certainly they are not as difficult to execute as “pot-follows-member” or some of the “transferrable annuity“ ideas he was knocking around before the HMT ambush. He is going to get support from the consumerists and especially the press is he can convince them CDC does something about rip-off pensions.

Item (3) is considerably more ambitious; the Dutch CDC model was after all a way out for many Dutch employers who could not hack the costs of a marked to market DB funding regime. Already noises are being made about “New Brunswick”, a Canadian municipality that switched its pension from DB to CDC for the same reasons. His mooted appointment of one of the politicians who engineered New Brunswick, suggests that Webb may be paddling this Canadian canoe!

 

Why do we need more legislation?

At a more detailed level still, it was becoming increasingly obvious that the Bridge case was making it pretty well impossible for any organisation, employer or provider sponsored, to develop Target Pension plans. The Alliance Bernstein “Retirement Bridge” has been on the slipway for some years now and someone is going to have to “kick the chocks” for it float. The Bridge problem is that as soon as you set the target, that target is interpreted as a promise- at least by the British legal system. Promises are defined benefit and need to be funded as such, pay levies and sit as risks on somebody’s balance sheet.

Hopefully the new legislation will be cleverly enough drafted so that it makes Bridge and much that the Bridge judgement was based on, irrelevant

What we think the legislation (which we hope to see soon in draft) will do, will be to transfer the funding risk from the sponsor or provider to the member. While this is of course what conventional DC does, Webb will argue that the member’s protections have been reinforced by CDC schemes embracing the standards of governance, transparency and value for money, introduced in his Command Paper “Further Measures for Savers”. Defined Ambition is a sugar coated pill. Its detractors argue that it is no more than a placebo and that DA is no more than DC by the back door.

Ensuring that the public can be convinced that DA and DC are different is Webb’s biggest political challenge for the rest of his term.

 

Maintaining the consensus

If he succeeds, Webb’s legacy will sit fairly on four legs;

  1. He has successfully reformed the state pension scheme, creating a platform on which he can introduce private pension reforms
  2. He has introduced auto-enrolment and legislated to make auto-enrolment schemes fit-for-purpose
  3. He is creating a third-way pension that can be used (alongside the PPF) to sort out the problems with legacy DB plans (including perhaps taxpayer sponsored plans)
  4. He is creating a third-way pension that can fill the gap not served by annuities (or retail drawdown products). Essentially he is returning the payment of pensions to schemes.

Though there are many within the DWP, who see the Budget Reforms as a political smash and grab raid, Webb is far too a politician to be outflanked. He has struggled for years with the Treasury’s Government Actuaries who have implacably opposed the relaxation of DB or the introduction of DC Target Pensions. Ironically, GAD’s own minister has made further resistance futile.

Steve Webb should be commended for seizing the opportunity to give Britain the quality pensions available to many of our Continental neighbours. I doubt that he will be the Minister to oversee their implementation but am hopeful that if that person be Gregg McClymont ,these four legs of Webb’s pension strategy will be maintained. I think Webb and McClymont are from the same stable and are driven both by political ambition and a genuine interest in improving welfare.

I fear the threat to pensions by the far right. I see pensions as easily being chucked out in the “red-tape” box and I probably speak for the industry in this (if nothing else), we do not want to see unravel the consensus that Webb has established. The danger of trying to de-rail CDC is you end up de-railing other things!

For me, supporting CDC makes total sense. Integrated into the rest of a well-thought through pensions strategy, it will be a tool that may help us address some of the remaining problems in our pension system.

 

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in annuity, auto-enrolment, CDC and tagged , , , , , , , , , , , , . Bookmark the permalink.

Leave a Reply