Leave DB – we need proper DC



I don’t care if you fall it CDC, target pensions or “proper DC” as I call it in the title. What we need is an opportunity for everyone who has saved in a retirement plan to be paid a wage for life and to my mind that’s what a pension is.

Which is why you can keep your ISAs out of this conversation. The ISA is a decent way of building up a capital reservoir, but it won’t pay you a wage for life and needs to be kept in the shed outside the pension house.

Until now, the only thing that got called a pension was “guaranteed”. The state guarantees your pension (though not when you get it!), employers guarantee your pension (until it gets too tough and they hand over to the PPF and insurance companies guarantee you a pension , if you buy an annuity.

The funny thing is that we work all our lives with no idea if our pay will go up , down or even be there next year, then we get to retirement and we expect the income for the rest of our lives to be guaranteed (and usually to be inflation-proofed too!).

It’s the cost of that guarantee that has done for Defined Benefit pensions and it’s done for annuities too. it hasn’t sunk the state pension because the state can change the basis and timing  of the benefit according to its needs. in this, it has something in common with CDC.

CDC is a way of turning DC into a pension without anything being guaranteed.

CDC is not a dumb-downed version of DB – it is proper DC – DC which pays a pension.

All this is a preamble to the main point of this morning’s blog. It follows a post from a friend of mine who is a Friend of CDC.

I had a long chat today with  one of the civil servants at the DWP who would be drafting any CDC legislation.

He has made the following points:

a) The Pensions Act 2015 was really drafted to allow Defined Ambition and shared risk schemes. Whilst the CDC section was tagged on to it, it wasn’t done as a stand alone section and you couldn’t introduce this bit of the Act without the whole of the defined ambition stuff as well. That means re-writing lots of pensions legislation and he thinks that’s a 2-3 year project with no guarantee of political support

b) An alternative would be to start from current dc legislation and see what needs to be done to is to allow collective accumulation and drawdown. He thinks this could be a much better way of approaching the problem

This may sound arcane stuff , but it’s vitally important to the way we organise pensions in this country.

Royal Mail and the 140,000 people it provides pensions to , have agreed to adopt a CDC approach just as soon as there are sufficient regulations in place for this to happen.

They might have a long wait if the DWP can’t find a way to write the regulations quicker than the 2-3 year project mentioned above. That wait might not be acceptable to Royal Mail or the members and that might mean a return to the strained industrial relations that have dogged 2017. 87% of the members have voted for a wage for life and CDC offers it, cash-balance DB and DC don’t cut the mustard.

But we should not plan this nation’s pension strategy around 140,000 workers – the rules need to work for everyone. Royal Mail is the spur to prick the sides of DWP’s intent. But no more.

People don’t trust DB and don’t understand DC.

The fundamental reason why we need Proper DC – e.g. DC which pays pensions , is clear to see , to anyone who has been following what has been going on in Port Talbot.

The real reason  around 18,000 of the 43,000 eligible steelworkers  have applied for a transfer quote, is that everybody is fed up with the scheme’s sponsor – TATA. If you don’t believe me – read this.  People are increasingly distrustful of their employer’s capacity (let alone intentions) to meet the DB  guarantees and they are taking their money away by the billion. Lloyds Banking Group have seen £3bn leave its scheme in 2017, Barclays are reported to have lost even more, one pension scheme CIO I spoke to last month tells me his colleagues call him “cashpoint”.

This is all very well, were there a decent place for all this money to go. This is not to say that good financial advisers aren’t doing a sterling job managing the SIPP drawdowns for their clients, but a lot of this money is not going into carefully planned retirement decumulation plans but into plans that I fear will not end well. Much of the criticism of what has happened at Port Talbot has been levelled at the advisers. As far as I can see the advisers have used legal SIPPs which invest into legal funds with legal charging structures. All this may seem fine until you do the maths and realise that the only guarantees from these funds is financial ruin.

People who say that DC has been unfairly demonised by government – argue that DC would give as good as DB with the same contribution level. This is tosh – for one thing – DC has a finite horizon – even the NEST guided pathway tips you into an annuity. That means shorter investment horizons , lower investment returns and no either an annuity or no insurance against living too long.

People don’t trust DB and don’t understand DC, the only reason that DC is not a scandal is that we haven’t seen its outcomes (yet).

Proper DC now!

We need proper DC now and it should be the default for anyone who wants a pension from their retirement savings

I’ve been saying this for the eight years I’ve been writing this blog and I’ll be saying the same thing for a good few years to come!

DC is not fit for the purpose of paying ordinary people pensions , DB is no longer trusted. 87% of the 140,000 postal workers were prepared to go out on strike rather for the right for a wage in retirement.

Those steel-workers who I spoke to had little or no idea how their SIPPs would pay them a wage for life and neither have I. The same can be said for most workplace pensions that have no pension strategy other than to signpost those at retirement to financial advisers who have capacity or inclination to help anyone but the “wealthy”.

Proper DC will help Royal Mail and the postal workers, it could help USS, it would certainly help those taking DB transfers and it will be a godsend to those managing workplace pensions.

The DWP seems to have got the message

Cross as I am with the DWP chasing rainbows with their pension dashboard plans, I am still a huge fan of Charlotte Clark and her team. I am confident that those looking at writing the secondary regulations for DC will find a way to quickly and efficiently deliver us Proper DC – CDC – Target Pensions.

Part of that confidence is because of the 50 or so Friends of CDC who are doing everything they can to help!

If you think you are a Friend of CDC – please drop me a line on henry.tapper@pensionplaypen.com and I’ll keep you in the loop.





About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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