Bob Compton MD of Arc Benefits is quietly spoken but an acute listener. He wrote to me yesterday this mail which provides a fascinating insight into the debate over how we fund our open and closed DB schemes and the alternatives we can offer to employers for whom providing a DB pension presents insuperable challenges.
Email sent to Henry Tapper 10/11/20
I listened to the Pensions Bill committee reading as it happened on Thursday. As a result I have a few comments to share with you.
- Guy Opperman was very impressive in his grasp of the issues debated, with one exception.
- There appears to be all party support for the majority of clauses in the Pensions Bill, other than some would like to hard code legislation in a number of areas to a tighter degree.
- Guy Opperman has committed to taking action to legislate on CDC within this parliament, but this will take 3 to 4 years to become reality. As we have seen from the speed of policy changes from the current government, this could easily be conveniently forgotten in the coming months ahead if more pressing post EU jurisdiction problems arise.
- Guy Opperman has unbelievable faith that the Pensions Regulator DB funding code consultation will not lead to closure of ongoing DB schemes, and as a consequence has squashed proposed Bill amendments which would have ensured TPR could not create an environment where DB schemes have no option but to move to an end game faster than previously anticipated.
In point 1 above the one exception is this:
TPR has gone into print as follows:
“We propose that Bespoke arrangements should meet the key principles and be assessed against the Fast Track standard.” …..“ They will submit their valuation, along with supporting evidence, explaining how and why they have differed from the Fast Track position and how any additional risk is being managed.”….. “Bespoke arrangements may receive more regulatory scrutiny..”
Guy appears to have been persuaded by the Regulator that this means Trustees choosing the bespoke route will be free to adopt Scheme specific assumptions without hindrance.
However TPR’s Fiona Frobisher has on 2 October at an FT webinar stated Bespoke
- will be benchmarked against Fast track assumptions
- will be have a greater evidential burden
- will face greater Regulatory involvement.
When challenged on the implications for open DB schemes in terms of increased governance cost, the pressure to conform to a gilts based investment strategy based on comply or explain, Fiona made a telling statement (summarized as) TPR is only concerned about securing accrued pension rights, not about future accrual, and that if TPR’s remit were to consider future accruals, i.e. open DB schemes that is a policy matter best left to government.
The implication being, TPR is more concerned about its remit for PPF preservation, than ongoing Pensions accrual.
This is further reinforced when Charles Counsell at a later PLSA event stated TPR’s future policy was all about looking after “Savers” with no mention of “Pensions”, leading me to question should TPR change its name to “TSR” The Savers Regulator.
AE has been successful in increasing the numbers saving for retirement, but has a long way to go to match the success of past DB schemes in delivering quality of life in retirement. DC is not a pension, merely a means to have the option to purchase an expensive annuity which the majority will not take up.
So to sum up Guy Opperman has and is doing a great job, but he has a blind spot, which if not challenged will lead to the hammering of the final nail in the coffin of open DB schemes.
I said it before, tPR is all about the PPF i.e. avoiding scheme falling into the PPF with less funding than PPF valuation, deficit that would need to be filled with levies on other schemes.
The only solution, and I say this again, is to reduce the PPF benefits for new schemes falling into the lifeboat. Something has to give, if we want open schemes to remain open.
DC schemes are great, especially for accumulation, however contributions are lower than what people used to contribute in DB schemes. Bring contributions to similar level like a total of 25% of basic salary, and you will see how quickly these pots grow. And the higher value they get, more decumulation solutions clients could get, including a CDC type.
Personally, I believe that best for decumulation is flexi drawdown on a 60% equity allocation, with equity allocation managed dynamically, followed by a pension annuity purchase at around 75 to 80, when health issues comes into play. So I would say for someone age 65, a 12 – 15 years decumulation invested followed by a level annuity for another 12 – 15 years. In my stochastic simulations, it beats CDC in giving a higher income, delivering 10% to 20% more for each member, higher to people with health issues. People will find this approach more intuitive as well, as they do not see losing their high value pension pot in case they die early, and it will allow them to spend a bit more early in retirement too. It is a win all the way, behaviourally, and in terms or meeting expenditure.
Once CDC starts, you will be surprised how many will transfer out of CDC around retirement age to use flexi-drawdown. Especially for Royal Mail, where many workers who were there for a long period, have a DB pension as well. It would be above 50% of members.
That is a well-articulated objection to the Minister’s position. Let’s hope that it finds use in parliament next week. We may yet see S123 reinstated.
It is particularly shocking that TPR should have no regard with respect to future provision, specifically as the cost of the Code is highest in this regard – not so much unintended as unconsidered consequences.
It is clearly the PPF which is driving TPR’s position on the Code, but the solution is not to further disadvantage DB members. It is to remove the Regulator’s objective with respect to PPF protection. Similar schemes exist in many other countries without any guardian angel and most of those pay full benefits – which the PPF also should.
I am very surprised at the findings of your stochastic simulations – they run counter to my own work and some well-established theory