Opperman – CDC makes pensions “more sustainable for employers”

From the office of Guy Opperman

Guy Opperman signs off his end of year vale dictum like this

Finally, we’ve made significant strides in terms of introducing collective defined contribution schemes. We’ve outlined a legislative framework for them, which spreads the investment risk, allowing for greater returns to members and improves schemes’ sustainability for employers. (my bold)

Those prone to conspiracy theories will note that this message wasn’t placed in the FT or any of the institutional pension magazines but in Money Marketing, whose readership has little interest in collective defined contribution schemes and less in the sustainability of pension schemes for employers. The conspiracy theorist will and is asking, just how will CDC improve the sustainability of employer’s pension scheme? “

To which (if I were the minister) I would choose between three answers

The proper answer

Many people in “workplace pension schemes” actually think that by participating, they will be entitled to a pension when they retire. If, these people reach retirement and don’t get a pension, then they will (unless something better comes along) have to follow various investment pathways to annuities, drawdown, cash-out or wealth creation.

The proper answer (if I was pensions minister) would be to declare DC workplace pensions unsustainable as they lead to a bunch of hard choices , none of which are efficient as a means of providing a wage for life. CDC makes workplace DC pensions more sustainable as they provide a promise of what people call a pension – (AKA – “a wage for life”) to participants.

The likely answer

The most likely reason for the inclusion of the claim that CDC improves the sustainability of an employer’s scheme is simply infelicitous phrasing. If this is the case, then this section of the article has been drafted rather more loosely than is usually the case at the DWP. Maybe Christmas festivities had spilled over into work-time and we can overlook a loose claim for CDC (unless you think as I do , that DC workplace pensions are fundamentally flawed to a point where they don’t deserve to be called pensions at all).

In the balance of probabilities, I suspect that the likely answer to what “improving sustainability of employer schemes” means, is that the drafting team were in end of term mode and weren’t too precise about what was said.

The disruptive answer

Ministers aren’t prone to throwing hand grenades into the carp-pond but that’s what this phrase could be interpreted as doing. If we are to consider employer schemes as DB schemes, then it would seem that the Minister is hinting at an easement for employers in the strain of supporting a DB arrangement.

If the minister means that open DB schemes might use CDC for the future accrual of pensions, which is what Royal Mail is doing, then there will be a number of employee representatives, most notably unions, lining up to protest. Open schemes such as much of the Railway Pension Scheme and USS are guaranteeing the defined benefit of an inflation proofed wage for life. CDC was never meant to replace those promises. The small but significant number of open schemes that backed the Bowles amendment should be reading this final paragraph with interest.

The alternative (and much more radical) interpretation of this phrase undermines the existing guarantees in place. If we are to read this phrase as the opening of a door that allows DB schemes to switch to CDC not just for future but for past accrual, we dispense with the entirety of the Pension Regulator’s funding code and swap it for a funding system where members get the best pension available within the constraints of a fixed set of contributions (which is what CDC gives).

I very much doubt that is what Guy Opperman meant, but the fact that several of my readers have picked up on the comment and asked this question proves that such thoughts are in the minds of hard-pressed employers. For many employers the DB funding code (as last presented) looks like the last thing they need when struggling to deal with the costs of the pandemic, Brexit and transforming to meet the challenge of climate change.

The idea that CDC might replace DB has been tried in the Netherlands and it hasn’t worked too well. People don’t take kindly to finding no rise in their pensions when the market goes down, when they believed the promise of inflation proofing. While it is possible to convince members of DC schemes that a pension can go down as well as up, the Dutch have shown that is much harder when a DB pension promise is in place.

Any idea being floated that CDC could replace DB pensions is highly disruptive.

What do you mean- Minister?

It would be helpful if the Minister, or one of his aides would clarify what is meant by the very ambiguous suggestion that risk-sharing improves the sustainability of pensions to employers.

I know of no employers who consider DC pensions unsustainable (that is one of the reasons auto-enrolment is succeeding).

I know of many employers who would be worried if they were participating in a CDC scheme where “risk-sharing” became “risk-reversion” when times got tough (the risk of supporting CDC pension increases through deficit contributions is still considered a risk by many employers).

I know of many employers who would gladly swap obligations to fund DB for a defined contribution into a CDC scheme.

CDC has the potential to transform pensions in this country, which is why it is such a debated topic. It has to be spoken of precisely as ambiguity will lead to speculation. For with CDC, careless talk is dangerous.

If there is a plan for CDC within the DWP – even if it is no more than a ministerial pipe-dream, then it is best it is shared. If – as seemed the case- CDC is simply facilitated by Government legislation and secondary regulations, then loose claims about risk-sharing “improving the sustainability of employer schemes” are best avoided.

After thought (but a good one!)

For those in an optimistic frame of mind, I urge you to consider Derek Benstead’s green line which represents the desirable outcome of any pension scheme, the ongoing payment of pensions to scheme members without any time horizon for closure. As this diagram shows, the enemy of good here is scheme closure, whether we are talking DB or CDC.

IF this is what the Minister is getting at then I thoroughly agree. If that is what he is getting at, then he is casting a cold eye on what has happened to DB schemes in the past 20 years and that gives grounds for optimism that the mania for de-risking  at all costs, that underpins the DB funding paper, may finally be receding. That would be a good thing.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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6 Responses to Opperman – CDC makes pensions “more sustainable for employers”

  1. ConKeating says:

    Sustainability is another of those currently popular words, like ‘sovereignty’ where the usage is incoherent in meaning. Sovereignty in the Brexit “deal” context appears to mean rule by King Boris and his cabinet of curiosities.
    To my mind, sustainability is the context of CDC is about the continuing viability of the scheme, and they are rightly member mutual bodies in which the sponsor employer has no interest, sustainable or otherwise.
    With Humpty Dumpty at large, Alice responded: “The question is,” said Alice, “whether you can make words mean so many different things.”

  2. michael Johnson says:

    Let’s be transparent. CDC is of no interest to the private sector; it has gone from DB to DC and is not going back, and legacy DB promises are going to be extremely tough to exchange for CDC. That leaves the public sector. I cannot think of any other reason why CDC legislation has emerged, other than to assist Royal Mail, very specifically, to dig itself out of a privatisation-initiated hole.

  3. Derek Benstead says:

    The large majority has a need for sufficient secure income for life in retirment, whether they work in the public service, are employed in the private sctor or self employed. Only a small proportion of peoiple have sufficient wealth they cannot outlive it. CDC legislation has emerged to provide a new means to provide a pension (in the sense of income-for life, not in the sense of a financial product qualifying for some tax privileges) in the private sector.

  4. ConKeating says:

    I am talking to four groups who would like to create CDC schemes. One is a single employer currently offering standard DC. One is a collection of self-employed individuals who would like to create this as a new offering where none currently exists. Then there is a new master-trust type arrangement for multiple employers. And finally I am talking with an open scheme which is investigating winding up its existing DB scheme, driven in large part by the insanities of the latest DB funding code proposals and offering CDC as the new alternative. That could create a very interesting new animal if the creation of it involves the transfer in of material amounts of assets and pseudo liabilities.
    I think you are completely wrong about a lack of demand.

    • michael Johnson says:

      Hello Con.
      Why has almost every actuarial consultancy disengaged from CDC (bar Aon)? They tell me it is lack of client demand. Or do you sense that once the legislation is finally enacted, interest will revive? I don’t. As an aside, more than one member of Royal Mail’s senior management has told me that they wished they had instead pursued a cash balance structure, i.e. today’s interim arrangement.

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