I write a regular column for Reward Strategy, formerly Payroll World. This is the last column I wrote for Jerome Small, who has been editor for a few years but is leaving to go freelance.
The people who pay us are most important and most under-rated. Under the pension freedoms, we elect to pay ourselves a “wage for life” – something that one economist called the nastiest, hardest job in finance!
But all that may be changing as the pendulum swings back toward a more formal way of getting our retirement savings paid back to us. If you’d like to find out more about this, then come to the Pension Play Pen lunch this morning (Monday 5th Feb) and keep reading this blog. This blog is for all those who pay us!
Could the pensioner payroll be about to make a comeback?
Paying pensions is hardly the most dynamic area of payroll – or pensions for that matter. But that may be about to change.
In December, 140,000 postal workers agreed to call off a Christmas Strike so they could be paid pensions. Yes – you read that right!
To be precise, an ACAS moderator forged an agreement was reached between the Communication Workers Union and Royal Mail to ditch its DC workplace pension and plans for a cash balance DB plan (neither of which would have paid a pension) for a CDC plan (that will).
The CWU had campaigned for a “wage for life” for all members. Initially it had called for a conventional defined plan, albeit one with minimal guarantees. But Royal Mail was not prepared to meet the strain such a plan would put on its balance sheet.
Instead, it agreed to pay a defined contribution into one big fat investment pot that paid a pension not based on a formula, but on what the pot could afford. With no guarantees, the plan put no more strain on Royal Mail finances , than a conventional DC plan. But members of the CDC plan will only get a guarantee on the tax-free cash due them when they take retirement.
CDC is short for Collective Defined Contribution – a type of pension that is common in Canada and certain parts of Europe and was the basis for pension settlements in the UK before defined benefit schemes were guaranteed. In the Pension Act 2015, CDC schemes were put onto the statute book as part of the Defined Ambition legislation, crafted by Steve Webb and the Coalition Government.
Because CDC is a variant of Defined Contribution pensions, it has no liabilities and while it will always provide pensions to groups of people, it need not be sponsored by an employer, it could for instance be funded by a transfer from another pension plan. Some workplace pensions are looking at offering a “CDC option” or even converting to CDC – though this is unlikely to be needed while individual pots are small.
And because CDC has no liabilities, it can be swapped for a conventional DC plan or even a guaranteed annuity – even once the pension has come into payment. To use the language of CDC – members will always have “property rights”.
So CDC presents those running pensioner payroll with a number of new challenges
- People can join the scheme and immediately receive a pension
- People can start receiving a pension, change their mind and revert to using pension freedoms.
- People may choose to have their tax-free-cash paid upfront , or as UFLMPS – where a proportion of the tax free sum is added each month to the pension.
- People’s pensions are not guaranteed and can go down as well as up. Changes to the level of pensions are decided by the people running the scheme based on actuarial advice.
For Royal Mail, adopting a CDC scheme would result in up to 140,000 people getting paid a “wage for life”. There are other large employers who are thinking of closing their Defined Benefit plans for future accrual, these include British Telecom and the University Superannuation Scheme. There’s plenty more where they are going.
Then there are all those who have taken transfers and have decided that drawing down an income is too troublesome and an annuity too expensive. If these people want a wage for life, then CDC might be a good way to spend their pot.We may have seen the high-water- mark for pension freedoms. Are pensioner payrolls about to make a comeback?
Finally there are the 10 million people saving using auto-enrolment. CDC may well become a way to bring the pension pots they’ve built up in various jobs together, as a way to supplement their state pension.