Learning to live from what’s in the (pension) pot

target pensions


Today’s the red letter day for the Pension Regulator (and to a lesser extent- the Pension Protection Fund) , when they find themselves under the scrutiny of the DWP Select Committee. In question is the competence and capability of both organisations deal with the deluge of large schemes knocking on their doors. Specifically Tata Steel , BHS and Austin Reed.

These are new school problems and we’re looking to provide old school solutions. I’d like to think that the Government, as part of its reaction to the problems of pension debt, will look to new school solutions and dust off the Pension Act 2015 which makes provision for a third way which spends the pension pot according to its means.

If this sounds at the top of the ladder of abstraction, let me climb back down and explain what I mean.

Right, that’s better – back on terra firma!

A finite pot, an infinite problem

There is a finite amount of money to pay pensioners in funded pensions (and the PPF is a funded pension and cannot fall back on the goodness of the tax payer).

There are infinite liabilities to the pensions payable. Were it true that the first person to live to 200 is already on the planet, we cannot be sure how long the PPF will have to pay pensions.

There is a  weak covenant from the former employer (Tata, BHS and Austin Reed) though it is likely that there will be a new employer. It is unlikely that the new employer would be prepared to take on infinite liability with finite funds. Even insurers struggle and Steelmakers and Shopkeepers are not insurers.

The only other solution is for the members of these various schemes (and anything up to 1700 other final salary schemes the Regulator considers basket cases) to accept a different deal, a deal where they share the risk of the pot running out and become a part of the solution rather than the problem.

There are a number of ways this can happen.

  1. The membership can go into the PPF and get reduced benefits guaranteed by other solvent pension schemes via the PPF levy,
  2. The membership can accept a curtailment of benefits (as a preferable alternative to the “haircut” they’d get from within the PPF.
  3. The membership could take transfers and go it alone
  4. The membership could accept a new deal with the trustees and sponsor so that (so long as they keep working) they get a defined contribution from the boss and the benefit is targeted rather than guaranteed.

The last of these three options is what is happening in the Netherlands and some parts of Canada and is known as Collective Defined Contribution (CDC).

Taking the asbestos out of the ceiling.

CDC is deeply unfashionable. It was kicked into the long grass last summer  by our Pension Minister (though I’m not sure she had a lot of say in what was going on last summer).

In any event, while the primary legislation for making CDC happen got on the statute book in 2015, the secondary legislation is incomplete. You might imagine CDC as a tower block whose structure is in place but which is waiting for the interior fittings. It stands awkwardly on the landscape, but it cannot be used.

The intention from its architect Steve Webb, was that CDC would be voluntarily adopted by those employers wanting to provide a more certain outcome than DC without the obligations of DB. In practice it is more likely it will be used as a way to take the toxicity our of final salary schemes. To pursue the building analogy, DB schemes have guarantees in them which (to employers) are like asbestos in the ceiling.

A new social contract

The biggest question facing CDC is whether it can be accepted by the unions, and most importantly Unison. Unison are the public service workers union and the guarantees within the public service pension schemes dwarf all others, they are underwritten not by the private sector but (generally) by the tax-payer.

Unsurprisingly, these guarantees form part of the employment contracts of millions of public sector workers, who form the majority of Unison’s memberships. CDC, as it might be used as an alternative to the PPF, is an alarming prospect for the public sector. New Brunswick is an example of a Government system where the social contract on pensions is that there is a finite pot , a finite contribution and the pensions will be paid according to the capacity of the pot to pay.

This is a very much weaker promise than a guarantee on existing benefits. But the guarantee is only as good as the sponsor’s capacity to pay. Tata, BHS and Austin Reed have currently no solvent sponsor so CDC sounds interesting.

But if the door is left open for these schemes, it is also open to others, specifically the 1700 weak pension schemes identified by the Regulator. And if they were allowed to operate on a “we’ll do our best with what we’ve got” basis, would it be long before the solvent schemes and even the LGPS started knocking on the door?

There would have to be a radically new social contract between member and sponsor, one based on trust that the employer would do its best and that the member would accept that sometimes “best” might not be good enough.

The Alternative

The realists, those like Michael Johnson and L&G’s Nigel Wilson, who want to see more transparency in the publication of pension debt, point to the £4.1 bn undisclosed debt latent in the Pay as You Go, unfunded pensions operated by the Government. They rightly ask whether it is right there is a social contract in place to pay these people in full while the rest of Britain’s workforce get by on the thin gruel of DC pensions or DB promises (which may not be kept).

The Alternative to the current system, one which is an elephant within the room, is a move towards unguaranteed pension benefits payable on a best estimate basis.

It is too much of a hurdle to expect this any time soon, but it is the central argument of retirement funding in this country and it is an Alternative that I expect to be explored and implemented within my lifetime.

I fully appreciate the objections of Unions and members to the threat of any dilution in the promise they currently get, but if we, as a nation, are to embrace risk sharing, we have to start with first principles.

So, as a big fan of Unison, Unite and other employer representatives, I ask whether now, at this time of acute strain on the PPF , we re-open the debate on risk-sharing and look again at CDC as a faire way of spending a finite resource on an infinite problem.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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