The way we safeguard our pensions today

This blog looks at the different way people are protected from mischief depending on what type of retirement savings plan they are in. I’m thinking about this because I have various meetings planned in the next month to consider what basis of protection should be given to people who join a CDC pension plan.

Wherever there’s a trust, there’s a risk that trust will be abused. Contract law is designed to minimise the capacity of the unscrupulous to abuse our trust by formalising the relationship between one party and another, which is why most the personal pension is written as a “contract” between provider and individual. With personal pensions, there is a contract not a “Trust”, there are Independence Governance Committees but no Trust Board.

In the past, that there were “trustees” was thought to be enough. But the abuse of trust by Robert Maxwell and his family, who raided the Trinity Mirror Pension Scheme has started a process to ensure that the actions of trustees are monitored and regulated so that similar abuse is not repeated. Lately we have seen the Pensions Regulator enforcing trustees to behave in certain ways and even putting in their chosen trustees from firms like Pi and Dalriada, to make sure good order is returned.

The proliferation of master-trusts that followed the compulsory introduction of UK workplace pensions, lead in the first instance to the creation of the master trust assurance framework and latterly to the provisions in the Pension Schemes Act which now require master trusts to conform to a set of standards enshrined in law. The inexorable direction of travel is towards a rules based regime where trustees do as they are told – much as they would have to – were there a contract between them and their members.

Philosophically, the gap between trust and contract based pensions seems to be narrowing , giving trustees less discretion and regulators more powers. Price caps, reserving, cost disclosure and assurance frameworks are all part of a process that ensures we get what we expect – value for our money.

Why CDC is different, difficult and dangerous!

With the contraction in the scope of trustees to do what they like  (exercise discretion) has come a desire to be told what to do. DB pensions now have to seek the Pensions Regulator’s permission before taking any actions that could impact the security of member’s benefits – this is because the Pensions Regulator has taken on responsibility for ensuring schemes do not fall into the PPF and become a burden on other schemes.

Usually, the process of getting permission (clearance) is a happy one and the right decisions are taken. When things go wrong, it is usually the Pensions Regulator who is now blamed (witness the spats between Lesley Titcomb and Frank Field). All this happens in a culture where benefits are not only “defined” but “guaranteed” – at least to PPF levels, by the whole system of occupational pensions.

But CDC is quite different, it is not about guarantees and the trustees of CDC schemes do not have liabilities, any more than the trustees of DC master trusts have liabilities. All that CDC pension plans have is money which they have a duty to distribute equally (equitably) to members. This is why Friends of CDC talking about it as an “equity driven” rather than “liability driven” pension plan.

This is why some of us want to see CDC regulated as an extended version of the occupational DC plan and not a cut-down version of DB regulations.

Incidentally, we don’t want to have a new code of pensions established as envisaged by the Pensions Scheme Act 2015 – a code called “defined ambition”. Defined Ambition is a nice concept that made it easy for Steve Webb to get people to see CDC (and a range of other ideas) incubated to meet the changing needs of pensioners (post freedoms).

CDC is different because it restores discretion to trustees, does not guarantee but creates a reasonable expectation and because it delivers what is in the pot – over time. This may sound woolly but it’s not. I have worked with products that aimed to distribute 100% of a fund over time and these products were equitable because they recorded the timing and incidence of every individual contribution and paid back people’s contributions with a keen eye to what was fair.

Interestingly, the products I am talking about were overseen by the then insurance regulator (LAUTRO) , there was no equivalent of the PPF or the Pensions Regulator. The demise of these products was because the trust that existed between LAUTRO and the insurers was broken by insurers who repeatedly broke the principles of prudence under which trust had been established. The most heinous example of this breach of trust was the Equitable Life but almost every insurer was guilty of buying the love of their policyholders by over distributing bonuses.

CDC is not only different but it is difficult, because it asks for its operators to be given back the discretionary powers that insurance companies last had in the days of with-profits, but to do so – not as insurers – but as trustees. This is not only difficult, it is highly dangerous – it is like giving someone a lump of uranium.

More “uranium” than “marmite”

I use the simile advisedly. A lump of uranium can- with care – create immense good – producing low-carbon energy that can save the planet. If used badly, then it can pollute (Chernobyl) or destroy (Hiroshima).

CDC cannot do as much damage as uranium but it has an equally wide range of outcomes and could- in the wrong hands- make “Maxwell” and the “Equitable Life” look like a walk in the park. Critics of CDC liken it to the kind of Ponzi Scheme we last saw being operated by Bernie Madoff.

To prevent this happening, we need to have the discussions about how CDC’s discretionary powers are granted before we begin and we have to learn from our past (and to a lesser extent from the pasts of other countries). The historical lessons are mainly negative (they teach us mistakes to be avoided, but they can also be positive, they can inspire us with a prize – an ambition – an aspiration.

Inevitably there will be those who never see the discretionary powers available within CDC as good (again the parallels with nuclear power are helpful). Those people are well known today. Their protest is helpful in ensuring that whatever is built and managed, is managed to the high safety standards expected of a nuclear power station.

Can we do without the power of fusion?

I suspect that technology will bring us advances over the next 50 years that will make our endeavours in 2018 look rather silly. Readers of this blog in 2068 (I flatter myself) may laugh at how puny our ambition was!

But we are where we are in the development of retirement distribution systems that transfer income into savings and back into income.

We have a DC system that transfers income into savings but cannot efficiently return savings to income. We have a DB system that can provide efficient income from savings but at an expense to initial incomes which is untenable.

We need to extend the DC system so that it can distribute savings back to income as efficiently as in DB, but without the strain on income (employer and employee).

We can only progress by pushing at the boundaries of what we know (past experience) and moving forward in hope. I am not sure we will get it right- infact I am sure there will  be setbacks- but you cannot build a progressive pension system without progression!

To use the language of the early part of this blog – we need a contract with the past but we need trust in the future. Creating that balance is what underpins my phrase “restoring confidence in pensions” and it’s what the Friends of CDC is trying to do.

If you can see this as I see it and want to be a Friend of CDC, please drop me a line at Henry.Tapper@pensionplaypen.com and I’ll make the introductions.