About the time that I was ranting to TISA about the complacency with which we are dismantling the retirement promises made to those who were promised a DB pension based on the years they worked with the company;- this happened!
Click the link to read what the DWP Select Committee are up to. For those who are “click averse”, I’ve left the blurb at the bottom of the page.
This is why the DA Pension (better known as collective defined contribution or “CDC” matters).
Forget the technical stuff – this is how CDC could matter to you.
Every single private defined benefit pension scheme in Britain is under threat of closure. That doesn’t mean you lose what you’ve got , or even that you have to take less than you’ve earned to date. It means that the pension promised against what you’ve yet to earn, is going to be based on what you can get from a pension pot – not more “wage for life”.
It needn’t have been this way!
At some point in the nineties , some hard-boiled eggs decided that the promise employers paid to pay pensions needed to be written in stone. Writing promises in stone is expensive and the weight of the stone sunk many pension schemes that , had they continue to promise to pay what they could, would still be helping you build a wage for life (rather than a pension pot).
What’s done is done. Most of us have to make the best of our pension pot and some of us have even decided to cash out our wage for life in return for a bigger pot. The hope is that there will be some way to convert our pension pot into a wage for life that suits us when we get to wanting to spend our money.
Advance to Go – collect £200
In 2014, the then pension minister Steve Webb, decided to allow the old style pension schemes that didn’t have promises written in stone – to start up again and call themselves “CDC”. He was successful and the idea became law in April 2015. Unfortunately, the new Government decided that the market didn’t need anything as old fashioned as a pension system that worked, but that we wanted a brave new world of financial empowerment , free of pensions or at least with pension freedoms (probably the same thing). This meant scrapping the detailed rule-making which would have meant that CDC schemes would be available about now and investing in Pension Wise, and the Pension Dashboard and trusting in the market to come up with innovative solutions (aka silver bullets).
Unfortunately, no matter how many times we have passed “Go” since then , few “collect £200” silver bullets have been dished out. Many people are already looking at the “community chest” or “take a chance” as their best chances of winning.
Confidence in pensions is not high
Since Frank Field took over as Chair of the DWP Select Committee, he has seen one great pension scheme after another sink beneath the weight of the promises written in stone. BHS, BSPS, USS, Royal Mail, Halcrow, Hoover Candy and a whole load of smaller schemes like Austin Reed, have all either “closed to future accrual” , “entered the PPF” or used an RAA to become semi-comatose or “zombie”. This blog is full of it – just key these words into the search button at the top of the page.
It is highly unlikely that – had the old system persisted – or if schemes like Royal Mail had been able to revert to the old system in future, that much of the argument, industrial action and the general turbulence we are seeing in places like Port Talbot or Scunthorpe would have happened. Put simply, Royal Mail, USS, BSPS and Hoover Candy might all have carried on providing a weaker promise – a promise to do the best they could – if they had been allowed to convert to CDC.
But that couldn’t happen – because of the stupid mistake made by the Government in the summer of 2015.
Head and Tails.
The idea of CDC, as presented to the House in 2014/15 was to provide a way for companies to convert from a DC plan to something like the original idea for the company pension scheme before promises had to be written in stone. Unsurprisingly, employers were less than enthusiastic to put their necks into a noose which might again be tightened when the CDC promises were re-written in tables of marble.
It was a case of heads we lose . tails we lose. Few- if any- employers told Government they would voluntarily take up anything that could remotely be interpreted as them providing staff with guaranteed pensions.
Meanwhile, the only way members could convert their pots to pensions was being given a good kicking by George Osborne
“from this day forward, no-one will ever have to buy an annuity again”
Which was all jolly good news for those who believed you could turn mutton into lamb using pension freedoms. But while the freedoms are fine for the high-net-worth, financially literate clients of IFAs, they are not going to provide the steelworker or the postman with a wage for life.
We have given the nastiest, hardest, problem in finance – to people least capable of solving it.
CDC however has the capacity to operate without an employer’s sponsorship. It could be used to bring together the disparate pots of the postmen and the steelworkers and provide scheme pensions rather more efficiently than through individually advised drawdown and without the risks of DIY drawdown.
I have argued this point to the FCA at their stakeholder events which they ran this autumn as part of their Retirement Outcomes review. I was publicly ridiculed by the FCA moderator in the room for suggesting that “risk-sharing” along CDC lines could provide the innovation needed to sort out the postmen and the steelworkers and the people who never had a DB pension and are hoping that “something will turn up” from auto-enrolment. In short the mass-market that they have been worrying about as part of their work on FAMR.
It’s Tails you lose your wage for life and Heads you lose your chance to risk share! Guided pathways and annuities at 75 all round!
Weirdly, the simple answer to the mass-market retirement problems that the FCA are considering, is sitting on some shelf in the DWP’s Caxton House office.
If Frank Field and his committee can get this message and then transmit it to the people in Canary Wharf, running the Retirement Outcomes Review, we will have the most significant piece of joined up Pension Government since Steve Webb left office. It’s a big “if”, but it’s the only game in town right now.
There will be more Royal Mails, more BSPS’ and the next one is just around the corner. There will be more feeding frenzies like the one we’re seeing at Port Talbot and there will be some very disappointed people who’ve taken “no-brainer” CETVs over the past 18 months.
Even if the DWP Select Committee, get the drafting of the CDC secondary regulations back on track, they are unlikely to be finished before 2020. So CDC is not going to be a silver bullet for the 2018-19 scheme casualties. Nor will it be a solution for people who have DC pots and want them to pay them more than an annuity without the risks of advised or unadvised drawdown. They too will have to wait till at least 2020.
I am not holding my breath, I’ll respond to the DWP consultation (as I’ve just done re the problems in South Wales). Until we have a pension minister who busies himself in these issues and a regulators who are in listening mode, 2020 looks a pipedream.
But pensions are long-term plays – the wheels grind slowly but sense prevails.
It’ll be a long-time coming but change is going to come.
Blurb
(an appendix for people who don’t click the link at the top but who want to know more about CDC) – the text of the DWP SC press release.
Collective Defined Contribution (CDC) pension schemes are a new – to Britain at least – type of retirement saving plan with the potential to address some of the concerns that policy makers and the public have about the current pension “offer”. They are commonplace in the Netherlands, Canada and Denmark but are not yet allowed in the UK.
Defined ambition schemes
Also known as a form of “defined ambition” scheme, they differ from Defined Benefit (DB) schemes in that you are not promised a certain retirement income – although as we are seeing often, the company sponsors of DB schemes are not always able to keep those promises.
A CDC scheme instead has a target or “ambition” amount it will pay out, based on a long term, mixed risk investment plan. CDCs aim to pay out an adequate level of index-linked pension for life but this is an ambition rather than a contractual guarantee. They have the scope to redefine the benefits they offer if circumstances – like adverse economic conditions – require.
CDC differs from the traditional Defined Contribution (DC) schemes that are largely replacing DB schemes in that it does not produce an individual “pension pot”, which you then have to decide how best to use for your retirement, but invests your savings in a larger “collective” pot, and then provides an income to you during your retirement.
Thus, CDC schemes take the big central decision of pension freedoms out of retirement planning, and also much of the risk. In the Budget this week the Chancellor announced plans to “unlock” investment in UK infrastructure through longer term investment in “scale-up”, innovative business: CDCs have been identified as a potential source of this type of investment.
Potential benefits to savers
The Committee is launching a new inquiry into merits of this idea, the role that ‘defined ambition’ CDC schemes could play in the pension landscape, the potential benefits to savers and the wider economy, and the legislative and regulatory framework that would be required to make it work.
The Committee’s ongoing inquiry into pension freedoms has highlighted the general level of mistrust and disengagement with pension plans, and it is well known that policy makers are keenly looking for ways to get people to plan and save much more for their retirement.
Advocates of CDC schemes argue that they provide greater assurance of retirement income and more efficient pooling of costs and risks among members than traditional DC, but do not impose the burden of underwriting an onerous pension promise on employers. Studies by the RSA and Aon Hewitt estimate that CDC could have delivered 33% better pension outcomes than traditional DC over the past half-century.
Detractors argue that CDC may further fragment the pension landscape, suffer from lack of demand, and run counter to the trend towards greater individual freedom and choice in pensions.
The Pension Schemes Act 2015 created by the 2010-15 Coalition Government defined “shared risk/defined ambition” or CDC as a distinct pension category.
However, regulations under the Act to bring them into effect have not yet been introduced. In October 2015, the Government announced the plans would be shelved indefinitely so as not to distract from other major reforms such as auto-enrolment and pension freedoms.
Chair’s comments
Rt Hon Frank Field MP, Chair of the Committee, said:
“What the Select Committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could club together and pool the risk themselves”.
Call for written submissions
The Committee invites evidence from any interested parties on any or all of the following questions:
Benefits to savers and the wider economy:
- Would CDC deliver tangible benefits to savers compared with other models?
- How would a continental-style collective approach work alongside individual freedom and choice?
- Does this risk creating extra complexity and confusion? Would savers understand and trust the income ‘ambition’ offered by CDC?
Converting DB schemes to CDC:
- Could seriously underfunded DB pension schemes be resolved by changing their pension contract to CDC, along Dutch lines?
- How would this be regulated and how would the loss of DB pension promises to scheme members be addressed?
Regulation, governance and industry issues:
- How would CDCs be regulated?
- Is there appetite among employers and the UK pension industry to deliver CDC?
- Would CDC funds have a clearer view towards investing for the long term?
Submit your views
You can submit evidence through our evidence portal, or please get in touch if you have special requirements for submitting evidence.
The deadline for submissions is Monday 8 January 2017.
Perhaps there will be a role for master trusts in this new world, providing the governance and servicing whilst being one step removed from the employer, so that we avoid the USS type issues of an employer forcing major changes because they think the existing scheme is unavoidable
I had experience running these schemes in the 1989,s (they were allowable in a form in the pre Maxwell days) for the accumulation side.
But today I suspect they may have rather more to offer in the decumulation phase
Adrian
The master trusts can break the link with employers in decumulation and create independent pools of retirees; if NEST had had the secondary regulations from the DWP to operate a collective decumulation section , I’d have lobbied to have allowed this (as I would have for comparables such as NOW). The key is to separate employers from member outcomes. Any hint that they are underwriting long-tail longevity or market risk would be unacceptable. But of course we don’t have the regs and the best we can hope for is “guided pathways”.
None of this might have happened if the Pensions Industry had not been so complacent when giving evidence to the Work and Pensions Committee regarding The Single-tier State pension in 2013. Se what some organisation said when giving evidence.
The only people to speak out were Hymans Robertson and EEF (the manufacturers’ organisation). See paragraph 90.
It also seems very strange that not a single pension professional mentioned anything about loss of GMP increase that used to be paid via the way the state pension was calculated. This has also put an unexpected burden on pension schemes like the Royal Mail, USS who have to pay these increases which were previously paid by the state because they have to follow what happens to public service schemes. Back in March last year the Treasury announced that for people in the public sector anyone reaching state pension age on and after 6 April 2016 and before 6 December 2018 would now have GMP increases previously paid via the state pension paid via their occupational pension for the remainder of their life. As far as I can see this consultation is still going on. I assume the reason it is taking so long is that they don’t want to make an announcement about what will happen to GMP increases for people in the public sector if they reach state pension age on and after 6 December 2018 until nearer December next year as they know that if they don’t make public service schemes pay the GMP increases they will have tremendous problems with the unions.
The Treasury then made a further announcement in November last year Consultation on indexation and equalisation of GMP in public service pension schemes
Published 28 November 2016
85. The Government says that key considerations in the arrangements for ending contracting-out are: minimising the impacts on employers, employees and pension schemes; ensuring that amounts accumulated in occupational schemes up to the introduction of the Single-tier Pension continue to be paid; and ensuring that the sustainability of Defined Benefit occupational schemes is not undermined.[84]
Impact on Defined Benefit (DB) pension schemes
90. The NAPF set out the context for DB pension schemes in which the ending of contracting-out will be taking place. A recent survey had shown that only 13% of private sector DB schemes are open to new members; 55% are closed to new members but open to future accrual. 83% of DB schemes which are open to new accruals are contracted-out. Of the 13% which are still open to new members, one in five expects to close their scheme to current members and switch to a Defined Contribution (DC) scheme in the next five years. 12% expect to retain their DB scheme but on less favourable terms for existing members.[89]
91. Hymans Robertson, a firm of pension consultants, says that “for the 1 million private sector workers still lucky enough to have DB pensions, the prospects don’t look rosy due to the end of contracting out.” It believes the extra cost that this will place on employers “may speed up the demise of what remains of DB pensions”.[90] EEF (the manufacturers’ organisation) agreed that the abolition of contracting-out and the loss of the NIC rebate could lead employers to close DB schemes.[91]
92. DWP acknowledges that “the removal of the contracted out rebate without any mitigating response may create the need for additional funding from DB sponsors [ie employers]”. But it believes that “there are much bigger influences on the future of DB schemes, and loss of the [NI] rebate on its own should not, in general, trigger scheme closures.”[92] The Minister told us that the decline in DB which had already taken place meant that it could be considered as a “coffin that has got enough nails in it already”, but he did not believe that the impact of ending contracting-out would be “seismic” for these schemes. He emphasised that employers who continued to offer DB schemes did it because it was something their employees valued, and as a retention and recruitment tool.[93]
93. Neil Carberry of the Confederation of British Industry (CBI) agreed with the Minister both that “it is debateable whether [DB schemes] have been finished off for good already” and that the cost of the ending of contracting-out on its own was unlikely to “finish off schemes”. [94] Otto Thoresen of the ABI told us “I do not see this in itself as something that will trigger a huge further decline in DB”.[95] When Joanne Segars of the NAPF gave oral evidence in early March, she said that she also believed that DB schemes would continue. She was clear that contracting-out had to end with the introduction of the STP “because “there is nothing left to contract out of”. Her view then was that the key issue for pension schemes was to ensure that the change was implemented in a way that “does not add increased burdens on already hard-pressed scheme sponsors working hard to keep Defined Benefit pension schemes afloat”.[96]
96. However, these views were expressed before the Government’s decision to bring forward the starting-date for the STP by a year. In response to this announcement, the NAPF reiterated its support for the reforms but emphasised that “the Government has to ensure that the implementation of these changes is workable for pension funds”. It highlighted that the new implementation date created a “very tight timetable” and expressed concern about “whether it can be delivered”. Joanne Segars argued that “it is essential to give pension funds the flexibility and time to adapt and make the changes”. She believed that “if the Government gets it wrong it risks a fresh round of final salary pension closures in the private sector. Business which get caught on the wrong side of these changes will lose a significant rebate from the end of contracting out, and they will question whether they want to continue running these pensions”.[100] The NAPF believed “it would be a shame if big mistakes were made in a rush to implement the changes”.[101]
101. However, the TUC believes that “removing the need for trustee consent creates a significant risk of material losses for individual members”. It accepts that “higher NICs will generally represent good value for money for people currently contracted out” and acknowledges that, on average, scheme members will not be worse off because in general they will be compensated for reduced benefits or higher contributions through higher State Pension outcomes. But it points out that “because offsetting measures will be calculated at scheme level, rather than based on the impacts on individual members, it is highly likely that some members will be made worse off through this process”. It believes that these changes “will have an immediate detrimental impact on individual welfare following a long period of wage stagnation, and alongside higher pension contributions in the public sector”.[108] A number of other trade unions made similar points in their written evidence.[109]
102. The Minister emphasised that the private sectors employers concerned were not “out to do over their employees” but were simply seeking to offset the additional pension liabilities arising from the ending of contracting-out. They were “the good guys. These are the people who are still running final salary pension schemes”.[110]
Impact on employees
99. Employees starting to pay full National Insurance Contributions as a result of the ending of contracting-out will see an increase equivalent to 1.4% of relevant earnings.[104] The TUC calculates that on average employees will have to pay about £350 a year in additional NI contributions.[105] The PPI estimate was that the maximum additional NICs for employees would be £480 a year.[106]
100. The Government points out that “around 90 per cent of those reaching State Pension age in the first two decades after implementation will gain enough extra state pension over retirement to offset both the increased National Insurance contributions they will pay over the rest of their working lives and any potential adjustments to their occupational pension.”[107]
For 100 this may be true but only because is because most of that 90% are in the public sector who are not seeing any reduction in their occupational pension.
101. However, the TUC believes that “removing the need for trustee consent creates a significant risk of material losses for individual members”. It accepts that “higher NICs will generally represent good value for money for people currently contracted out” and acknowledges that, on average, scheme members will not be worse off because in general they will be compensated for reduced benefits or higher contributions through higher State Pension outcomes. But it points out that “because offsetting measures will be calculated at scheme level, rather than based on the impacts on individual members, it is highly likely that some members will be made worse off through this process”. It believes that these changes “will have an immediate detrimental impact on individual welfare following a long period of wage stagnation, and alongside higher pension contributions in the public sector”.[108] A number of other trade unions made similar points in their written evidence.[109]
102. The Minister emphasised that the private sectors employers concerned were not “out to do over their employees” but were simply seeking to offset the additional pension liabilities arising from the ending of contracting-out. They were “the good guys. These are the people who are still running final salary pension schemes”.[110]
103. We accept that, on average, employees who were previously contracted-out will not lose out in the longer term from having to pay increased National Insurance and pension scheme contributions, because most will gain enough in increased State Pension to compensate for this. However, within this average, some individual employees could lose out and some may face difficulties in the shorter term, especially if current wage restraints continue. We recommend that the Government undertakes more analysis of which employees might fall into this category, so that Parliament can properly consider what measures, if any, might be put in place to limit losses.