5 Things I want from today’s DB Green Paper

life-expectancy

Why Pension  Schemes matter (Source ONS)

The DWP is due to publish its Green Paper this morning. It’s an important initiative; -our defined benefit schemes are under threat but they have the potential to do much good not just to those in them, but to those who benefit from their investment.

With private annuities in the doghouse, many people have no private pension plan, they simply have a retirement savings plan. We need to get people back thinking about insuring against extreme old age, which is why I’m kicking this blog off with a graph showing how much more likely it is we’ll live too long than die early.

We still have pensions in this country, they are paid from collective arrangements organised to pay a defined benefit.

Of course not all DB schemes are funded, the biggest ones, including the state pension are Pay as You Go and funded from general taxation. My 5 item wish-list relates to the funded schemes and excludes the NHS, Civil Service, Teachers, Firemen and Police Schemes.

I hope that the Government will talk about these taxpayer funded schemes but not make them the focus of the paper; it’s the funded schemes that need immediate help.


My five item wish list

  1. NO DUMBING DOWN on existing promises. It is easy for Government to give away other people’s money. But the promises that have been made to those in final salary schemes can’t be rescinded or diluted. They are what they are, what the trust deeds say they are – even discretionary grants, once made , are promises. So long as there is a company to back these promises, they stay. Judging by the smoke signals (an article in this morning’s FT by DWP Secretary of State- Damian Green), benefit promises on accrued rights are being questioned.
  2. NO ENFORCED CONSOLIDATION of small schemes. The PLSA are still to publish its consolidation report, but the vultures are circling. Yesterday Willis Towers Watson announced that they would be providing a one-stop- shop for large schemes and implied this was the end for small schemes. I say b*ll*cks to that! The beauty of the tapestry is in the weave, of those 6000 Dhope B schemes, perhaps 80% are deemed small, heterogonise them and you’re left with a dull cloth without beauty or ownership. These schemes form part of our corporate culture. Small is Beautiful, read Hilary Salt’s epic blog on this.
  3. YES TO  MORE PRODUCTIVE ASSETS. That so much of our DB funding has been diverted from growth assets into debt financing is a national shame. How can we expect to meet the challenge of BREXIT if we put ourselves on the back foot. Richard Harrington is right to be ashamed that the best assets in his constituency are owned by a Canadian not a British pension fund. Let’s put our pension funds back to work,
  4. YES TO A GREATER PROPORTION OF GROWTH ASSETS. Let’s use this DB paper to nail the idea that Trustees have a choice in how they invest and that buy-out is not the only option. TPR has been guilty in the past on over-enforcement of de-risking and promotion of self-sufficiency. The PPF is a safety net and should release Trustees to invest with confidence , employers to accept risk on the balance sheet and Government to give clear signals to encourage those schemes that wish to persevere – to invest for the long-term,
  5. YES to CDC!    CDC is not a dirty acronym. It’s a way of accruing future benefits with a defined contribution from the employer and with conditional benefits for the employee. It is DC+++ , not DB(minus). If we are to have a long-term contract based on collective endeavour, then CDC is the way forward. If the Government is serious about providing people with an alternative to individual drawdown and annuities as a way to spend the DC pot, CDC is the answer.

So there’s me throwing down the gauntlet and asking Government how it’s going to respond. Of course my agenda won’t be the Government’s and I’ve no idea what the DWP have inside its Green Paper.

Hopefully by the end of the day i will be able to conclude this blog with an assessment of how the Green Paper fares against my wishes, whether I see it as an opportunity secured or lost and whether it shows a Government and Minister with a positive post Brexit strategy or with a strategy that’s a wimpy capitulation towards the lowest common denominator!

Life’s too short for many more consultations, let’s hope that what comes out of this Green Paper is positive and that we use it to restore nor undermine- confidence in pensions.

Or to use Damian Green’s sign off paragraph in the FT

The UK also has a proud history of consumer protection, and this green paper will be another step in making sure that we are delivering a pension system that works for everyone.


 

 

Here’s the link to the Damian Green article  https://www.ft.com/content/16d53fda-f526-11e6-95ee-f14e55513608

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Here’s the  opportunity

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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3 Responses to 5 Things I want from today’s DB Green Paper

  1. Alan says:

    Opportunity missed I feel. Look forward to your blog to see if you agree.

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  2. Tim Webb says:

    Henry – a succinct and honest blog! Commenting on your blog rather than the Green Paper:
    > Your graph says a lot!. It reinforces the arguments that allowing, let alone encouraging, pension flexibilities was a cheap and irresponsible way of dealing with the annuity market issue. How did we follow the approach taken in the US when 401K was introduced and it had been recognised that full drawdown had resulted in pensions running out long before life expired for over half of retirees – a problem visible for over 15 years?!
    >Proper pension provision is about taking less now so we can have more later – whether it’s very low savings ratios or pension flexibilities rather than a pension for life our greed for more and more today rather than taking a longer term view will not support many well.
    > On dumbing down, our belligerence to accrued rights being protected has led to many closures and giving up decent schemes sooner – maybe with hindsight allowing RPI to be replaced by CPI wouldn’t have been so bad (when resources were stretched)? On state benefits was triple lock necessary or an expensive stunt? If resources are plentiful it’s all fine, but when they’re not and other things are sacrificed, we should think further.
    > I’m all for making the assets work. Finally others are acknowledging the short-termism and consequences of a risk-free dogma and liability matching with risk free investments. The premium for having absolute certainty is too high – get those assets working and don’t hedge everything!
    > Maybe DB could work again with more realistic retirement ages linked to life expectancy and without guaranteed dynamism – some prudence in funding so pension increases could be afforded out of good investment performance – could work again!
    Tim
    (These represent my personal views)

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  3. Eugen Neagu says:

    Agree with keeping the initial promisses. Agree with investing in growth assets, being infrastructure or equity.

    Not keen on CDC, I said it many times it is something like with profits and we know how bad that ended.

    I do however agree with a cash balance guarantee, but not quite the way that Morrissons implemented it. For example a 4% per annum guarantee or a 2% per annum above CPI guarantee would be a good way to share investment risk between employer and employee.

    The Goverment should also look at annuities, the problem they are so low is that life offices take very low risk these days. Solvency II is not the only reason. There could be ways to encourage them to offer better deals to retirees.

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