I spent most of this cold dark weekend putting together a submission to the FCA on what we know is happening to millions of pounds of money that has been disinvested from the British Steel Pension Scheme and reinvested through the Vega Algorithm in the 5Alpha Conservative Fund.
I was working with ordinary steel men, IFAs and fund experts. Late on Saturday afternoon – having read the first draft, Stefan Zait wrote me
As I read it, I got more and more angry. Feel sorry for the families affected
i won’t go into more detail here, hopefully the damage can be stopped.
Can we make steelmen their own chief investment officers?
What a ridiculous question – of course we can’t!
What I’m learning from this work is
- That you should never invest in something you do not understand.
- That you need to know what you’re paying for
- That pension freedom does not mean the freedom to rip people off.
I am also convinced that the great pension schemes that have paid ordinary people like today’s workers at TATA steel have done a great job of investing people’s savings and paying them an income at a pre-agreed rate for as long as they and their partners need it.
What has gone wrong is not the mechanism of investment and payment – we call the pension. It is the expectation of certainty that has been given to ordinary people about that wage for life.
We cannot predict how the world capital markets will perform over the next three decades. nor can we predict how inflation will bite into stock market returns. Nor can we predict accurately how long we will live. Past performance is a guide but even the actuaries are confused about mortality trends.
So to guarantee a wage for life over the next thirty of forty years to someone in their fifties today is a mad thing to do. There has to be the flexibility to pay more or less depending on what actually happens.
These simple ideas have not been discussed at meetings between steel men and those advising them. Consequently many steel men have been convinced to leave the collective pension schemes which they feel may not pay out in full and put their trust in advisers who will manage their pots.
There is another way
While the steelworkers have been putting their trust in the likes of the Vega Algorithm and the 5Alpha Conservative Fund, the Communication Workers Union has been making it clear to its members what the risks of self-managing pots is and how much better it would be to stick with the traditional collective way of paying pensions.
Of course there is a problem with this. Royal Mail cannot afford to take the risks of markets going down, inflation going up and people living longer than expected.
What appears to have happened last week , is that Royal Mail and the CWU have come to an agreement on a level of risk that the Royal Mail can accept and what risk is right for the member to take.
The solution , which has been described as “Collective Defined Contribution” is discussed in yesterday’s blog.
What has happened between CWU and its members and latterly between CWU and Royal Mail is a proper discussion of pension risk and just who should be taking it. If this had happened at BSPS, I suspect that I would not have spent the weekend discovering the delights of the Vega Algorithm.
We all can be special but we can’t all be special in the same way!
Everyone has the right to a transfer value from a DB scheme (until they get within a year of retirement when they lose that right).
In my opinion , we should have the right to a transfer value even in retirement. in the trade this is called a “property right” and it recognises that in special circumstances people should have immediate rights to the capital value of the future income promise.
It gives us great comfort to know that if the worst happened, we could get a reasonable pay-out so that we and our immediate loved ones, would not go short.
A few people will be determined to manage their own pots (4% in the survey above). These people should have the right to self-determined pension outcomes. But it must be clear to such people that they are taking the risk of poor outcomes and that “taking their pot and letting an IFA manage it” does not guarantee them good outcomes.
In practice, we all want to be seen as special but most of us are happy to use the default investment – let the scheme pay our wage for life and be special other ways!
We need a retirement default – a single guided pathway that we can all agree on.
In my view, the solution that the CWU and the Royal Mail are working towards, provides just that. I hope it will cater for people who want to opt-out for health reasons, or wealth reasons or just because they think they’re special.
But i am sure that as with all other collective decisions we see in pensions, 90%+ of Royal Mail staff will stick with the default.
But let me remind those who are designing that default of what I have learned from all this stuff with BSPS members.
- That you should never invest in something you do not understand.
- That you need to know what you’re paying for
- That pension freedom does not mean the freedom to rip people off.
The agreement at the Royal Mail has been reached collectively and will be supported by the postal workers. The Solution at Tata was imposed on the steelworkers. Ironically, BSPS2 will probably offer a higher degree of security than whatever emerges at Royal Mail. But I will be very surprised if we see the scenes at Port Talbot at Mount Pleasant.
Whatever the CDC solution turns out to be, it needs to be intelligible, transparent and have total integrity. That’s a tall order – but if the CWU and Royal Mail can pull it off, we may be some way to restoring confidence in pensions elsewhere.
