Pensions or pots?

Whether you are in charge of the PPF , one of the 13 Carillion defined benefit schemes, or any one of the thousand or so “distressed” pension schemes that might no have a sponsor able to bale it out;-the term “self-sufficiency” should be intoned several times before going to bed. It will bring sweet dreams.

Immunising a pension scheme against the need for further contributions from an employer is now the holy grail for the Chair of the Trustees. It is of course impossible for any scheme to accurately predict the death of its final pensioner and funding for that event has to rely on either insurance (buy-out) or the use of an employer as a quasi insurer.

Defined benefit pension schemes weren’t designed with built in obsolescence.

Many schemes today have developed investment strategies that not only immunise themselves against all known risks, leaving only the risks we cannot imagine as “vulnerabilities”. It is an interesting philosophical question as to whether these risks are worth further investigation. I’ll leave that at an academic level, the sky could fall on our heads, but it’s a risk too far for me.

Which begs the question, what more can a scheme do?

The answer is increase it’s operational efficiency, so that the drag on the scheme’s investment strategy from the business of paying pensions , is minimised. This was the conclusion I came to last week. There is only so much you can do to set your investment strategy, the business of managing the needs of members gives much wider scope for progress.

Central to the argument is the question of “benefit”. A defined benefit scheme only “benefits” someone, if it fulfils a need. If there is limited need for a “wage for life” , then a member should consider exchanging “pension for pot” and create a capital reservoir to meet future financial needs on an “ad hoc” basis.

There is a strong body of opinion that thinks that people would be better off with capital rather than a regular income; it is what underpins tolerance of workplace pensions, which have – as yet- no confirmed “income for life” option, relying – as most DB schemes do – on the annuity market for “self sufficiency”.

It is highly ironic that the current Conservative Government – and in particular its leader , are calling for employers to sponsor defined benefit schemes to a point where they are insured against being a threat to the PPF, while encouraging people to save into DC pensions where the promise is “that no-one need ever buy an annuity again”.

As schemes consider how they can best operate to make themselves self-sufficient, I think it reasonable that they help their members determine for themselves whether they have special need of capital or would be better with a “wage for life” pension.

This has been the themes of recent blogs. I favour DB schemes running their own pension wise sessions for more mature members, something like John Cridland’s mid-life MOT to determine “pension or pot”

Towards personal self-sufficiency

Just as pension schemes should be seeking to be self-sufficient of employers, ordinary people should be seeking to be self-sufficient of work. Since work means pension contributions – in this age or workplace pensions, we could restate that as saying that we should be establishing our own personal “recovery plans” that ensure that our targeted benefits in later life are fully funded.

To a very large extent, this is what a CDC plan is trying to do. It is trying to take away the hardest nastiest problem in finance, the creation of financial self-sufficiency in later years, from individuals.  Instead CDC looks to share this problem among a wider group.

Pension or pot?

Reluctantly, the private sector his putting the guaranteed defined benefit pension scheme behind it and moving on. Putting the existing promise on a self-sufficient basis is the limit of a modern trustee’s ambition. Managing the strategy involves sound investment management and an operational strategy designed to maximise the efficiency of pensions , by paying them only to those who want and need them. Those who are special and need pots rather than pensions, should be free to leave and with blessings upon them.

But those who stay, who always assumed a company pension scheme provided a company pension (whether now called workplace or not), then an equivalent choice should also exist. Currently the choice is between an annuity and a capital reservoir (from which we can draw down). Neither is particularly satisfactory.

If Theresa May is calling for greater security for members of DB plans, she should also be thinking of security for those who are not in such plans. I will resist cheap shots about MP’s pensions (or of the gap in security between those in the private and public sector).

Pensions as well as pots!

What I am calling for , and all Friends of CDC are calling for, is that the Government are even-handed and put in place a basis by which those saving for their future, and those with existing DC pots , can have reasonable expectations of a target pension.

The cliff-edge – from which you fall when ceasing to accrue DB, needs to become a gentler slope. CDC is a way – not just for the 140,000 Royal Mail workers, but for the millions of new savers plus the rest of us historic DC savers, to think of our “pots as pensions” – if we want to.

Self-sufficiency is an aspiration for all. We should define our ambition and set the bar a little higher than we currently do. When I hear the Prime Minister talking about the future , as well as the past, I will be more minded to commend this Government’s private pension policy.

I want the Prime Minister on the left and not the one on the right