I have been thinking about the bigger picture this week as AgeWage and Pension PlayPen prepare to host our event on value for money on Friday.
The big idea behind AgeWage is that people want pensions and not pots. I spoke with journalist Ruth Emery yesterday, she had expected me to want to see the end of the word “pension”, infact I think that pensions are the key motivator to retirement saving, people want a wage for life that can help them stop work and enjoy their later years.
In the past we have relied upon employers to stand behind the promise of a wage in later age. The employer wanted a way of easing an increasingly non-productive worker out of the workforce and wants to recruit and retain good quality staff by offering a pension for this purpose.
But this idea of sponsoring retirement is gone horribly wrong. Instead of “doing their best”, employers have been required to “guarantee” and with that guarantee come obligations that are prioritized. Employers have to prioritise the funding of pensions above the payment of dividends and investment in research and development. Many argue that the low valuations of British listed companies is linked to their mountains of pension debt.
The most stark example of pension debt destroying value is in our university system where the issue of pensions has led to national strikes and a breakdown in teaching morale. Employers should not be underwriting people’s pensions , but if not employers – who?
A return to mutuality
The idea behind Collective DC pensions is that they allow employers to provide the means to pay pensions but do not put the pension obligation on the balance sheet. If we are brutal, the pension members receive is down to what the markets deliver. But by using collective buying power, a large CDC scheme of 100,000 or more savers, can turn into a pension scheme which pools investment and mortality risks and harnesses economies of scale to deliver much more predictable results than individual can expect on their own.
In this sense, employers can make the conditions for people to get pensions without underwriting the pensions themselves. The Royal Mail CDC scheme is unusual as it organizes the pension payable throughout a postal worker’s membership. The employer is going beyond the provision of a pension pot and running a single scheme to and through retirement. This is brilliant where there is a workforce that is stable and has strong identity, it also works very well where unions are creating that stability and identity. Royal Mail is one such employer, The University system could be another, but there are very few large employers capable of replicating the Royal Mail CDC model.
What is needed is a means for employers to sponsor pension saving to a point where they can hand over the payment of pensions to commercial organizations which organize collective pools that pay pensions based on market returns. But employers must feel that their obligation ceases when the savings cease and that they are not on the hook for the payment of pensions.
The obvious candidates for these commercial organizations are the funders of our commercial master trusts (whether for profit or not). If they are to pay wage for life pensions then they are are going to have a new way to underwrite the mortality and investment risk and this is what CDC does. CDC allows an immense reservoir of capital to be used to pay pensions and that capital comes from people’s retirement pots that could be exchanged for scheme pensions paid by the likes of Nest and People’s Pension and many others.
But these master trusts must be allowed to ring fence the operation of this CDC pool from the employer’s obligations. The CDC pool must be self-sufficient and run as a “pensioner mutual” where all money is linked to the payment of pensions only.
The going rate for pensions
It is important we develop a new option for savers which is in addition to the existing investment pathways (both advised and non-advised).
People should in future be able to get a digital quote from a master trust for the pension they could be paid under CDC rules, based on the money they can put into the pool and their age at which they start drawing their pension. While some people might transfer before drawing the pension, most people will transfer into a CDC scheme at the point when they want their pension to be paid and they will transfer that proportion of their savings that they want tied up in paying them a wage for life.
So the going rate of exchange will become important and people will need to work out the value of the promise being made by the CDC operator. While most people will use a CDC scheme linked to their workplace pensions, I expect there to be plenty of shopping around and where people are buying , they will need to be sophisticated in doing so. The sustainability of the pension as well as quality issues such as the responsible management of the investment pool, the flexibility of payment options could all be factors for individuals to consider.
But crucially, people will be taking decisions based on the commercial provider and not on their employer’s covenant. By transferring the risk of pension management from employer to the commercial provider, the member is finding a new partner to share risk with. The going rate of exchange for pot to pension is a very interesting idea to explore.
Restitution of pensions
I recently argued that for those who are in a position to claim they were mis-sold a pension transfer, the basis of the claim is that they should not have given up their pension in the first place. For these people to claim compensation, there needs to be a recognition that compensation should be to restore them to a pension scheme, a scheme that pays them a wage for life rather than a drawdown from a pot.
Tough as this sounds, I do not think we should be paying people compensation into the pots unless there is no alternative. Right now we should be exploring whether we can find an alternative and I believe that CDC schemes run by the funders of master trusts may emerge as a candidate. In the short term we may have another candidate if we can use the superfunds or even find a way for bulk annuity providers to offer scheme pensions.
But it is almost impossible to think that the long-term return to pensions rather than reliance on pots, will see the level of guarantees that dominate DB pensions today. We cannot and should not try to sell CDC pensions to people as guaranteed pensions, they are pensions where people take the risk and share it with all the other people in the pool. They pay a commercial manager to manage the pool not to underwrite their pensions.
This is how we create confidence amongst employers that once the savings phase is over, their job is done and they can signpost the CDC pension system to employees who are looking to replace a wage from work for a wage for life.
I don’t think the pension system has got here yet, but we are on our way. I actually think ordinary people will find the idea of a pension as opposed to an investment pathway , more in line with what they expected. While it may take a bit of adjustment to consider their pension as something that could go down as well as up, I think most people will prefer such a pension to an annuity – especially when they see the going rates for annuities and CDC scheme pensions.
The importance of good decisions
Whether it be the individual saver, with a variety of pension pots or the employer recognizing it would sooner not be running its own pension savings scheme, we need to consolidate. We also need simple metrics which help us work out what has happened to our pensions and what to do going forward. This is what the value for money agenda is about.
On Friday we will be discussing how we can create the consolidation which creates scale from which risk-sharing can happen. People need to be able to manage their pension decisions but they need options which mean they don’t have to manage their own pensions. Right now, the decisions are too hard, we need to make it easy to make good decisions with the increasing money people have saved for their retirement.