What are the barriers to collective pensions?


I’m working my way through Stephen Timms’ 10 big questions posed by the introduction of the pension freedoms. It’s clear from the questions themselves that the Work and Pensions Select Committee don’t see everything quite cut and dry as George Osborne when he announced them in the 2014 budget. People may still feel good about not being yoked to an annuity at a time when annuities are expensive, but we still have an underlying yearning to be paid when not at work.

The 3m of us who will be coming off furlough later this year have had a pre-taste of how retiring with a replacement income might feel.

In yesterday’s blog I discussed the advantages of a collective approach to providing a wage in later age. Royal Mail’s bold move to offer a wage for life to its workforce means that they at least have worked out what they are paying contributions for. A worry is that most “workplace pensions” promise a pension and fail to deliver and in this blog I move on to the third of Stephen Timms’ questions

Are there barriers to providing other pension options which meet a need and are not currently available in the UK?

the short answer is “yes there are” and in this blog I will look at why it will be very hard for Britain to return to a pension savings system where it is the pension and not the saving that is the focus.

Barrier one; margins

The margins for providers of pension services differ. Workplace pensions operate commercially as GPPs and master trusts and are subject to considerable regulatory scrutiny . While employer trust based schemes are not run commercially , they are subject to  the price cap on the default fund and services to the trustees are generally purchased by competitive tender. The same cannot be said of wealth management where value is considered to cover more than just the financial outcomes of the product but a range of ancillary services that include financial planning, well-being and the perks of being in a club for the wealthy (read my blogs on SJP).

Many wealth managers see occupational schemes (whether DB or DC) as feeder schemes for their wealth management services and these services are extraordinarily high margin. Here there is no cap on price and very little competitive purchasing, the wealthy appear happy with tags such as “reassuringly expensive”.

The high margin world of wealth management uses self invested personal pensions as a tax-wrapper to protect high net worth clients from capital as well as income taxes and these wrappers also enable much of the wealth management to be delivered without the charge of VAT.

Collective decumulation – or the payment of scheme pensions from CDC – could potentially destroy wealth management margins as effectively as the RDR , the abolition of conditional charging and the imposition of the charge cap, destroyed wealth accumulation margins. There is a fierce opposition to collective pensions from the retail wealth management sector which while understandable, is not in the interests of the consumer. That is because in protecting the wealthy within the moat, this lobby denies those outside the moat who can’t be deemed wealthy, access to a valuable service and product.

Barrier 2 – the cult of de-risking

There is within the pensions industry a healthy skepticism about taking on unwanted risk. So much risk was assumed unnecessarily by employers in the closing years of the last century that any intimation that further risk could be around the corner drives those who could be deemed to be taking it, to run for cover.

Principally this relates to the sponsors of DB pensions who having been once bitten are twice shy, but also it means their advisers and employers who did not run DB benefits for staff and are determined never to do so in future.

De-risking doesn’t just mean taking risk off the table , it means keeping risk off the table and it is only in cases such as Royal Mail where the risk was so great that it was about to break the table, that a collective pension scheme like it’s proposed CDC scheme is likely to be entertained.

Employers are in no mood to re-risk and for that reason they are very unlikely to set up CDC schemes unless it actually takes risk away and that means swapping guarantees for market-rate  pensions. For that to happen at places such as our seats of higher learning, the alternatives to CDC have to become equally unappetizing. We are not there yet.

Barrier 3 – the comfort of certainty.

CDC is sold as disruptive and indeed it is. It disrupts the cult of de-risking and it challenges the notion that if something isn’t guaranteed , it isn’t valuable. It introduces an acceptance of doubt about the payment of pensions that appeals to the pragmatic but shocks the purist. The purists in this case are those who deal with absolutes – the financial economists for whom the polarities of DB and DC are fixed and where everything between is “magic money”.

I find all three barriers to change understandable and indeed I see high margins, low-risk and the comfort of certainty as wonderful things when you are the beneficiary. However we live in a world which values fairness and high margins for the few can mean empty pockets for the many, low risk for employers mean high risk for staff and certainty can too often mean the certainty of failure.

For which reasons I see the barriers to the adoption of CDC as false barriers which need to be spoken of and broken down.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to What are the barriers to collective pensions?

  1. Could I suggest there are at least three other very big barriers to the sustainability of collective pensions, which mean they may be more like DC with added risks, rather than akin to DB. In particular:
    1. Pension Freedoms (which allow people to transfer out and potentially select against the remaining scheme members by taking a value that could be inflated in the short-term – either because markets have done very well, or because they know they are in poor health, or they are just fortunate in their timing and prefer to pass on an individual fund to next generation without needing much pension income
    2. Inter-generational risks, where the young may find the fund does not look after them in the distant future – this extrapolates from the problems of DB sustainability, with schemes looking well-funded in the early years, as few pensions are being paid out, while plenty of contributions are coming in, however over a series of market cycles those who have already taken money out or received early pensions may have received more than was sustainable in the long-run
    3. Lack of inflation protection – DB became so expensive and ultimately unsustainable partly due to the requirement to add inflation protection. Especially after QE and the ultra low negative yields on inflation-linked gilts, there are concerns that this could result in large problems for those who lock into fixed incomes for 20, 30 or more years. That was part of a problem with the old mandatory annuity rules, where people looked for ‘best rate’ without realising the product itself might not be suitable for their long-term future
    I do worry about the long run here, even if there are short term attractions to pooling. It seems to me that much of the benefit of CDC, relative to DC, is more about economies of scale which can lower costs and improve investment performance in theory, rather than hugely improved pensions being sustainable for many decades. The individual flexibility and adaptation to individual health circumstances is important as people get older, but are not yet factored into CDC as proposed. There are not even any risk margins foreseen which could avoid some of the selection bias for those transferring out.
    Of course, others will disagree, but just thought it might be helpful to air some concerns at this stage
    All best wishes

  2. Bryn Davies says:

    You miss the biggest barrier, which is convincing employers that there’s something in it for them in the absence of effective trade union pressure.

  3. Bob Compton says:

    Henry, an excellent appraisal of the 3 main barriers, that require airing. Ros has added 3 others, but I would suggest you can roll Ros’s 3 main concerns as “Consultants fears” worrying the CDC is closet DB. I am sure Con Keating would have much to say, but as I understand CDC as promoted by Con and others a truly effective CDC scheme would only ever an individual member pensions or transfers out based on their individual share at any given point. I appreciate however CDC schemes would be available with different structures, where Ros’s concerns would be real.

    The future for CDC has to be Master trust based with the creation of CDC sections in those Master Trusts that will dominate the DC AE world over the next 10 years as the AE market evolves and matures. Stephen Timms committee I hope will see this is the way forward for all AE members to have a new choice to be able to have at least a part of the later years income to be as dependable as their state pension, with drawdown for any balance being the raining days pot,

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