Setting your pension free to invest as it pleases.

Royal Mail - Nice one George!

Yesterday I wrote about the CWU’s proposals to keep the Royal Mail’s DB scheme open for all it’s 130,000 members. I then went to watch my equine investment portfolio perform at Cheltenham. Opening my inbox this morning I find it full of requests for information and (maybe coincidentally) a meeting request from the Pension Minister.

While my inbox is full, my wallet is empty – surprise surprise!

As for the CWU’s proposals, I can now declare an interest. First Actuarial have advised on this idea.

But  I don’t want to promote First Actuarial, I want to explore the benefits of adopting the CWU’s approach and address a misunderstanding of John Ralfe’s.

I have been pressed by several friends to better understand John’s positions and we’ve seen eye to eye on a number of matters lately, but I think he’s missed the point of the CWU’s proposals- entirely! Pension Freedom is needed!

Here again is what John was telling the FT…

 “The company would require all of the money to be invested in matching bonds, so there would be no risk of a deficit, but at the same time no potential inflation reward for members.”

If the Trustee’s have no regard other than to secure current promises – no problem!

To avoid balance sheet volatility on accrued benefits, the existing Royal Mail Trustees should do as John suggest. Indeed that is pretty well what they’ve done;  and the Royal Mail Pension Scheme is so bond-heavy it may have to close to future accrual.

But the problem is not about the past, it is about the future!

The issue is whether future accrual to a pension scheme should come without a guarantee on increases in pensionable pay or whether a “core benefit” (say a career average benefit paid at state retirement age ) could be guaranteed without a further obligation on the employer – other than to meet the defined contribution.

I understand the CWU proposal is “revaluation-lite” and uses the statutory minimum increases in payment to avoid balance street strain. What’s more it can use a pretty juicy discount rate as the lack of guarantees frees the trustees to invest as they please! If they consider they are in DC territory, then a DC investment strategy seems right.

As we all know, defined contribution schemes tend to invest in equities as the default investment option just as defined benefit scheme tends towards bonds. I have recently divested my DC pot of all cash and bonds and now pursue a 100% “real asset” strategy as I have no intention of drawing any money for some time. I invest as I please.

The idea behind the CWU’s proposals is that by reducing the guarantees on future accrual, the employer will have less concern about the volatility of the funding position, at least on “non-core” benefits – indeed it might be argued they have no liability for outcomes- only for input (the DC).

This being the case, the Trustees of the Royal Mail scheme would be free to invest as they pleased. Of course the 130,000 posties caught up in this will range from youngsters to those virtually pensioners and the future accrual portion of the pension will have to meet pensions in payment almost immediately. So the “as they please” bit is a little more complicated than my personal situation,

But I hope my point is clear and that John can pick up on it. It is a “good thing” for pension schemes to invest in real things and not just in other people’s debt. Real things mean real investments, real jobs and a growing economy that can support real pensions. It really is that simple.

And if you are working out a funding rate to meet target pension levels, you can use a discount rate that takes account of the higher expected returns from those real assets.

Now I know John will point out that such returns are only achieved at the expense of some security on member’s benefits, but his comparator is with DB and not DC. If I look at my DC promise to myself, I see its value up and down like a yo-yo.

The compromise solution envisaged by the CWU accepts that the risk between employer and member has to be better shared, it does not suppose that by investing in real assets, the risk is eliminated.

But there is one further player, beyond the trustees, employer , unions and members. It is the Government. The Royal Mail knows more than most UK employers how Government can intervene to change the rules of the game. If I was looking at the CWU’s proposals from the shareholder’s point of view, I would be looking for a golden key type promise from Government that they would not allow the DC promise to turn (at some time in the future) into a DB expectation and ultimately into a DB promise.

This is why the DB Green Paper has been regarded as lacking in ambition. IMO, it needed to look again at risk-sharing for future accrual precisely as the CWU are doing.

One seemingly insuperable obstacle facing a DB-lite proposals is that future pensions cannot be paid at the trustees’ discretion but have to be paid according to minimum statutory criteria (CPI up to a maximum of 2.5% pa).

Why DC pensions should enjoy total freedom in payment and DB pensions cannot have the flexibility to revalue at what the scheme can afford – is beyond me!

But hope is not lost! The DB paper is a consultation and the Royal Mail proposals are no more than that! Perhaps I should use my time with the Minister to argue for this change, so that in future we can keep accruing DB benefits on the with-profits basis I wrote about yesterday.

In a wider sense – at last we have a clear case study on which the DWP can focus. Let’s hope that we can use this opportunity to help 130,000 posties and a much wider constituency of DB deprived workers, for whom the CWU settlement would be more than their wildest pension dreams!



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to Setting your pension free to invest as it pleases.

  1. Bob Compton says:

    The great news about the CWU proposal, is that it is the Union that is taking a pragmatic approach to retirement income delivery and has grasped the nettle. This forward thinking has more merit than forced creation of super DB funds to “solve” the DB “problem”. Small DB Schemes efficiency is not the problem, the problem is legislation driven scheme design, choking off innovation and common sense.

    • Kevin Wesbroom says:

      So one part of the Superfund challenge will be to see if CDC style benefits could be provided, hence addressing your innovation and common sense points Bob

  2. Kevin Wesbroom says:

    Hi Henry – as a life long member of club called “The Answer is CDC – now what is the Question” you will not be surprised to know that I am very supportive of this design and approach. Even though you say “If I look at my DC promise to myself, I see its value up and down like a yo-yo” life doesn’t have to be like that. With suitable actuarial control techniques one can get a better balance between investing for the long term and having less volatility of outcomes.
    Oh and BTW there is not need to provide statutory increase in payment, if you set the scheme up right in the first place!
    So please crack on. We would like to see CDC style pensions as part of Superfunds – the more that can be done to promote the idea the better.

  3. henry tapper says:

    Thanks Kevin, I am intending to lobby for the removal of the statutory increase in payment (for future accrual). It doesn’t sit well with the pension freedoms and is a serious impediment to risk-sharing. I know that we are on the same side (though I suspect you are probably less solicitous of the pension rights of those in small schemes, for whom (the PLSA’s vision for) superfunds represent an existential threat)!

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