This article was first published in Professional Pensions.
Machiavelli’s commented that “there is nothing more difficult to carry out nor more doubtful of success nor more dangerous to handle than to initiate a new order of things”.
For the DWP to enable Royal Mail to offer its 141,000 workforce a DC pension that pays a wage for life undoubtedly falls into the “new order of things” category and is confirming the dictum.
The criticisms of CDC range from IFAs who call it “with-profits in disguise”, through policy makers worried it carries with it risks of inter-generational unfairness. Add to this worries about nuts-and-bolts issues on scheme communication and it’s not hard to see why regulatory progress since Pensions Act 2015 has been so slow.
These are valid challenges to CDC. If CDC cannot demonstrate that it can be more transparent than with-profits, that it insures across rather than between generations and that it has proper nuts and bolts– it will fail. The next 18 months will determine whether the abstract arguments for CDC can be turned to practical application.
That the Work and Pensions Committee announced an inquiry into CDC while Royal Mail and CWU were finalizing their Four Pillars agreement is unlikely to be a coincidence. As their final report puts it, the agreement
“As well as being a model of constructive industrial relations… opens the door for CDC to move from abstract idea to practical reality. This could transform the UK private pensions landscape”
The Committee calls on Government to open the door not just to Royal Mail but to “accommodate mutual, multi-employer and standalone schemes”. The Committee hints at a broader vision where CDC pensions become a default investment pathway for people transferring-in DC pots. It specifically talks of CDC as a means for the self-employed to provide themselves with a replacement income in later life.
This is precisely the innovation that the FCA has been calling for in its retirement outcomes review and it is unfortunate that the Committee’s report was not published prior to the FCA’s review’s findings.
The FCA will no doubt be looking with interest at the Royal Mail solution in the light of its finding that 94% of us are not taking financial advice on retirement affairs. The simple choices for members around CDC (to join or not to join), make such schemes attractive to the silent majority who are showing no aptitude for or interest in engaging in pension matters.
The advantages of open collective schemes are also evident in investment strategy. Since CDC schemes would remain open across generations, they could invest in patient capital projects with commensurate benefits in terms of investment performance.
The long investment horizons encourage the kind of investment strategies that characterised the early days of Defined benefit investing when the emphasis was on buy and hold growth strategies rather than liability matching. The implications for our wider economy of collective schemes returning to these principles appear entirely beneficial.
Finally, and most intuitively, CDC makes sense as a means of solving one of the most intractable of economic problems, the money to set aside to provide yourself a wage for life. Pooling longevity risk creates a mutual settlement that eschews both “boring” annuities and “scary” drawdown
All of which, begs the question, just why is this “new order of things” getting such a lousy reception?
Is it, as Machiavelli supposes, that
“the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order; this lukewarmness arising partly from the incredulity of mankind who does not truly believe in anything new until they actually have experience of it”.