For the third day I am returning to the CWU’s proposals to the Royal Mail which I now consider the most important break through in pension scheme design we have seen in Britain this century. I base this on three arguments
Argument one
This is a bottom-up proposal that arrives at the doorstep of one of our biggest employers (the Royal Mail employs 130,000 posties). It has been forged by a Union looking for a way out of a bind created by unfortunate (not malicious) decision-making by employer and trustee. It is delivered at a time of deadlock in negotiations over the future pension promise which could lead to industrial strife. The provenance of this proposal is unimpeachable.
Argument two
This proposal is made without need for any concession from Government to make the Royal Mail a special case. It does not rely on the establishment of some new pensions vehicle, an over-ride of existing scheme rules or the application of half-completed regulations. It makes sensible use of existing pension scheme rules and does not rely on special pleading.
Argument three
It returns pension funds to being a source of economic capital for an economy in need of growth. That the proposed SIP focusses on the growth of assets rather than the de-risking of liabilities is a strong statement from its authors of pensions resurgent. This proposal is the first (I hope of many) solutions to the problems of our occupational pension schemes that regards pensions as a source of national benefit, not of liability.
The Purpose of Pensions
I don’t know why he linked in , but link-in Eddy Truell did to me yesterday. I see he is Chairman of an organisation called Disruptive Capital.
I picked up his invitation while listening to a lecture from David Pitt-Watson Pension Corporation on the Purpose of Finance. While Eddy is no longer involved in PIC (other than a small shareholder) it seemed a happy coincidence. I hope this is a sign that the steady decline of what we call “private pensions” may be disrupted!
Whether you like him or not, Eddy Truell has been a disruptor in pensions for some time now. I hope that the partnership between Pitt-Watson and PIC indicates a consensus for the need for things to change. Truell and Pitt-Watson are unlikely partners but it is from such collision of opposites that productive reactions can spring forth!
For the CWU’s proposals to work, we need a sensible conversation between those who own the capital (Truell & Co) and those who organise the labour (CWU). And we need a lot of good common sense!
Pitt-Watson’s lecture included a booklet with a handy checklist of characteristics of “purposeful pensions”. The list’s in green, my thoughts on the CWU’s proposals in bold.
- It will have an effective return seeking saving system into which the saver can put their money; the CWU plan to invest contributions for the best interests of the members of the scheme.
- It will pool longevity risk effectively; the CWU’s proposals treat the current and future workforce of the Royal Mail as a self-insuring pool.
- It effectively moves capital through the economy investing in assets which give a real return long term. The proposal is for 100% of invested monies to be in equities,
- It has clear and appropriate actuarial information; unlike the with-profits approach of the past, the CWU proposals come with a proper actuarial plan based on prudent assumptions clearly set-out procedures for dealing with bad times and good
- It is and is felt to be-trustworthy; the proposal is from an employee representative, it is not dependent on any financial institution’s participation, it is from the people for the people.
- It is able to offer a degree of flexibility in the promise it makes and is able to accept a degree of flexibility in its investment returns to allow (benefits) to be higher. The benefits proposal is designed to flex non-core returns based on the investment conditions while guaranteeing a core of returns which form the basic pension.
- It has low costs and is likely to be exploring scale economies; this is achieved through the plan being available to all employees, whether currently accruing a defined benefit or receiving a Defined Contribution.
- It is adequately capitalised and/or flexible in its promises; the proposals do not require seed capital but depend on an ongoing commitment from employer and from the membership to fund the scheme at equivalent levels to the current DB funding (c 22% pa)
- It operates within an effective and appropriate regulatory regime; as already said, the CWU proposals do not require any testing or change to current occupational scheme regulations- the proposals play by the rules.
- It has fairly aligned the interests of members with those of shareholders and other stakeholders; the consensual approach adopted to putting forward these proposals gives hope that they will be adopted by the employer’s management and shareholders. The proposal is an alternative to the deep-rooted concerns among the Royal Mail workforce to the DC proposals put forward by the employer and the use of the existing DB arrangement (for future accrual).
Leadership
At last night’s lecture, several of the questions from the floor were about leadership. I suspect that the leadership needed to solve the pensions crisis will come from without rather than within (despite Tracy Blackwell’s assertion to the contrary).
The CWU are showing leadership. They have determined to be very public in their approach and I am pleased to help give their proposals some oxygen. The FT has set the ball rolling and the pensions media is showing interest.
The idea of running a low-guarantee defined benefit scheme at a defined contribution is not a new one. But finding a way to execute such a scheme is new.
I commend the CWU for its leadership, my firm are pleased to have given the CWU help with the numbers and some of the technical pensions advice needed to ensure these proposals are legally robust.
I hope that as we progress the debate, we can look at these ideas in more detail. For the CWU’s proposals to the Royal Mail, if they are adopted , could be the basis of pensions resurgence.
You can find David Pitt-Watson’s and Hari Mann’s “The Purpose of Finance” report (sponsored by the Pension Insurance Corporation here
