A big thank you to Imperial College Business School for making this a public lecture, It brought 140 people together, encouraged some sharp debate in the chat room and gave a platform to John Ralfe to explain the con trick he suspects Royal Mail and its unions are pulling on the 140,ooo postal workers due to join its Collective Pension Plan in a few months time.
As John pointed out, there was nothing new in his arguments which he has widely circulated in articles over the past three years. They focus on supposed unfairness in the scheme design which mean that older savers will get more than younger savers in terms of pension and transfer values. I don’t want to argue against his points but I do question what the point of the lecture ended up being.
This was also the central question in the discussion between John and Professor David Miles, Imperial College Business School who (expertly) chaired the session.
If John considers the Royal Mail CPP a con, does he consider CDC as a means of risk sharing a con – or is he simply concerned about specific design features?
The conspiracy theory that RMCPP is a con, needs to establish a motive as to who benefits from the years of hard work that has gone into making the CDC solution happen,
What has happened at Royal Mail is that unions, employer and members have voted to accept risk sharing and the solution designed for the Royal Mail is considered right by all the key stakeholders. It is also being supported by Government who have legislated to allow the RM CPP much greater legislative security than if they had set the scheme up under the vague provisions of the 2014 Pensions Act.
It is hard to attribute a negative motive to such a consensus. John hinted at an actuarial conspiracy between Aon, WTW and First Actuarial but CDC hardly looks a money-spinner for consultancies awash with pension work.
If the point of the lecture was to expose RMCPP as a con, then I suggest it did not move the dial, I suspect that those who attended left with the views they brought to the meeting which were either pro or against John’s pre-stated position.
But you will soon be able to judge for yourself, as the Brevan Howard Centre have recorded the event and the link is at the bottom of this article.
Nothing that CDC can do that DC can’t do
But if the point of the lecture was to prove a wider point, to use John’s assertion “there is nothing that CDC can do that DC cannot do”, then we really should be looking at both and asking what DC is currently doing.
We have a lot of data on what DC is doing , most importantly the FCA’s retirement income market data.
DC is providing people with choices at retirement which people appear to be struggling to take. The one general conclusion that can be taken from people’s use of pension freedoms is that they want to strip out their tax-free-cash and bank it. Beyond that , people are following their own pathways, some drawing down, some deliberately rolling money up and many waiting for someone to give them a definitive course of action – or at least a default.
What DC can do, is build up the money to purchase a pension. What it cannot do, is provide that pension to purchase. When we get to retirement we have to tread our own pathway, there is no common road.
This point was not acknowledged by John Ralfe who appeared to think that because he has no problem deciding what he wants, others will be the same. This form of myopia is very dangerous, especially among pedagogues.
I had an unusual insight into John Ralfe’s attitude to his audience prior to the meeting started. I turned my Zoom on 15 minutes before the start and went to make myself a cup of tea.
To my surprise, my computer accessed a conversation between John Ralfe and the technical team discussing technology which included the following
“you see that box there, that’s Henry Tapper, he’s an absolute lunatic, on no account let him ask a question”.
The voice was John Ralfe’s and it was followed quickly by someone telling him that everyone whose name John could see, could hear what he was saying.
I am sure we have all done silly things on Zoom so I forgive John Ralfe his gaff. But I don’t forgive him his instruction to suppress questions from “absolute lunatics” of which there were many in the audience. They included Kevin Wesbroom, Mark Rowlinson and Bernard Casey, all of whom asked questions that John wouldn’t answer as they didn’t feed him the opportunity to say what he wanted to say.
Worst of all, John Ralfe made every attempt to over ride the Chair during the discussion so that he didn’t have to answer the very important questions Professor David Miles was asking him. Very rightly, Miles told him that he had spoken for a long time (over 40 slides) and that it was time he did some listening.
That was good advice.
Imperial College Business School has kindly shared the recording of the talk
I’m reminded of Niels Bohr’s words…
“We are all agreed that your theory is crazy. The question which divides us is whether it is crazy enough to have a chance of being correct. My own feeling is that it is not crazy enough.”
“It is not enough to be wrong, one must also be polite.”
“There are some things so serious that you have to laugh at them.”
How these sayings are applied to the above report and persons I leave to the reader. Personally I prefer the Copenhagen interpretation.
I had to look up the Copenhagen interpretation but given what has been said in the article and from Martin T it might just fit the bill!
It is a shame that Mr Rolfe used these type of words, or even that he thinks like this.
However I tend to agree with him that CDCs are not more than a DC scheme. And that older people get to benefit more, in fact they get to benefit from the young people contributions. That seems to me like a con, and I think the scheme could be created in such a way that this could be avoided.
In the same time I understand this scheme will ultimately reward long term employees, the ones which stay for long with Royal Mail. The smart ones would be the type of people joining Royal Mail at age 50 which a view to stay there for 10 years and retire, which will benefit more than the young people who join them at 20 and stay for 10 years.
The C added to DC seems to sort out the retirement phase. I am not sure why this is not a solution only for retirement. In fact we had these type of solutions until 2017, like the with-profits annuity from Prudential, and there was another annuity product and even a drawdown product with some guarantee. However there was not that much attraction towards this. The only difference would be the fees, CDC may be able to produce lower fees.
I work a lot with people coming to retirement, I do not think there is that much traction for CDC. My view is that more than 50% will transfer out coming to retirement.
John is very keen that we should see the uniform nature of final salary awards (or career average) – say 1.5% of final salary for each year of service – as unfair to the younger generation and produces a calculation that shows the 64 year old saving the same contribution amount for just one year while the 25year saves for forty. As with so much of Ralfe’s work, this is incomplete and misleading.
The first thing to recognise is that the life expectation of the 25 year-old is much greater than the 64 year-old – the pension that they will receive is 25% or so larger than that of the 64 year old. Then, of course, the 64 year-old is actually paying in far more cash than the 25 year-old – when salary differences are taken into account the twenty five year-old’s accrual at age 65 would be approximately twice that of the 64 year-old.
Then we need to consider the risk and uncertainty positions of the 64 year-old and the 25 year-old. For the 64 year-old some risks, such as salary increases, have entirely crystallised. But if we simply look to the relative times over which uncertainty is faced – the 64 year-old face 24 years and the 25 year old 67 years. Using the usual square root of time rule for the growth of risk and uncertainty, we see that the 25 year-old faces 1.7 times that of the 64-year old.
Putting these together, we have a relative investment difference of 2/1.25 = 1.6 in favour of the 64 year year-old but relative uncertainty of 1.7 in favour of the 25 year-old. As a 25 year old, I would be (was) very happy to take that arrangement on – as have many millions of DB participants. It is also clearly fair in the Rawlsian sense of a veil of ignorance.
The only difference here is that we do not speak about a DB scheme. This is a lot different from a DB scheme, this is why its name is DC!
The uncertainty is magnified by the possibility that your 64 years old make take from the funds “earmarked” for the 25 years old. In a DB scheme this difference (if it exists) is paid by the employer. There could be two things which could lead to this, wrong life expectancy assumptions used for the 64 years old, plus bad investment return. It will lead to what we are all afraid of intergenerational subsidies.
My view is that by retirement more than 50% of members will transfer out, and it would lead to a lot of arguments, comparisons with market indexes, comparisons with similar DC schemes etc.
Once the negative sentiment is out there, there is no way back. Once people believe CDC schemes are shorting them when transferring out comparing with a similar DC, the negative message will be out there, some may even sue the employer.
Note that, in the illustration above, I have deliberately not used the usual argument that the 25 year-old expects to benefit from the disparity in turn in his or her older working ages, though it probably has some merit.
Unfrtunately, I got hung up on a work call, so missed this.
However, I repeat my question, to which no-one has yet had the courtesy (or is it ability?) to reply.
I spent five years on pensions consulting, including writing booklets for schemes to help members understand benefits.
I did the same with life assurance and individual pensions.
No-one has yet shown me a CDC booklet that explains to a member clearly what he or she will get.
Failing that, I believe it’s a fudge.
Simple folks want a pension in retirement at reasonable cost. CDC helps with that by taking a lot of hassle away from the individual. Investment choice, annuities, drawdown, etc is too much for your average postie. It is not viable to have experts holding your hand. Pooling investments for a longer investment horizon and pooling mortality cuts a lot of ‘margin’ out of pensions. Royal Mail and its unions have a large pool of employees prepared to give it a go. I say good for them.
Having seen some DC pensions effectively wiped out through charges and commission (even some auto enrolment iterations) then at least CDC has everyone pulling together in an efficient operation to provide what should be better member outcomes. That’s what Royal Mail and its employees strive for and I’m afraid Ralfe is just too binary and a self proclaimed ‘fundamentalist’ – but he never learns from experience – just textbooks. He even points to Japan’s 30 year stock market graph as evidence that equities can stay low for a very long time but ignores the impact of dividends!
Thanks Stephen, haven’t heard from you in a while. Your points are well made, thanks for looking at this through the eyes of ordinary people