The Americans are right in discouraging the phrase “pension scheme”.  Like “default fund”, the phrase plays badly to people who think scheming and defaulting are examples of bad not good practice. I was set to thinking this while publishing and promoting the latest criticism of tPR’s CDC funding code.

Testing times for the CDC code – Keating and Clacher https://t.co/IDMYcpCNnj The assurance that benefits will only be cut if investment performance is poor is more reassuring than telling members their pensions will depend on the assumptions of the scheme actuary and trustees

— Henry Tapper (@henryhtapper) March 20, 2022

Most people relate to being a member of a “pension fund” more happily because a fund is a sum of money saved or made available for a particular purpose – and a pension fund provides a pension.

“Schemes” feel unfunded, and many are. They include the Teacher’s Pension Scheme, the Fireman’s and the Civil Service Schemes. They depend on a strong sponsor to stump up the money , (not Charles Ponzi).

The Americans substitute “Plan” for “Scheme“, but even “plan” has an awkward resonance, it suggests an experiment with a degree of uncertainty

“The best laid plans of mice and men  often go awry”

What “plans” and “schemes” have in common is the need for a sponsor, a third party whose promise is based on a set of external circumstances happening – and historically that sponsor has been an employer. The sponsor needs to stay in business and be strong enough to support the promise or the promise itself is broken. This support is known in pension circles as “the covenant“.

And of course there are very few employers whose covenant inspires a lot of confidence. Those employers who run or participate in  DB pension schemes find themselves in dispute with their members and their representatives, think Unilever, Royal Mail, USS, even some Private Schools. DB schemes’ unless funded from general or local taxation, struggle to call their covenants “gilt-edged”. Even schemes like Lloyds Banking Group , which is pretty well self-sufficient , spends much of its time in the high-court arguing the nature of its pension scheme promise.

Which is why we have a Pensions Regulator, whose job has principally been to assure members of employer funded pension schemes (and the PPF) that promises will be paid.

But time has moved on , and so have employers. They increasingly don’t want to be subject to any covenant based on a promise, unless they have control of the cost of that promise. Hence DC and – if you are Royal Mail – CDC.

But what the 5 years since Royal Mail agreed a deal with its unions tells us is that setting up any new kind of pension scheme is incredibly hard. It will take another year for a penny to be paid into Royal Mail’s CDC scheme. It has taken two lots of primary legislation and now a contentious CDC funding code, to just get us this far.

The cost of applying for a CDC scheme is £77,000 and that’s per benefit section. And as Con Keating and Iain Clacher have explained, the cost of keeping a CDC scheme within the CDC Code means that most “schemes”  will not get off the ground.

CDC Pension Schemes will be rare as hen (ry)’s teeth, the employer pension covenant is as good as dead.

We need pension funds – not schemes.

There is an alternative to running a CDC pension scheme, I haven’t the right name yet , but I’m provisionally thinking of  “a CDC pension fund“. I have explained how such funds can be set up in this blog, and I will be running a Pension PlayPen coffee morning with Just Retirement’s Mark Johnson, which looks at how close we are to running CDC schemes today.  The link to the coffee morning will appear here – you need to be a pension playpen member.

A CDC pension fund is not sponsored by an employer, it is funded by pension savers who choose to swap their conventional pension pot for a pot that pays a pension.

The pot that pays a pension is run as a pooled fund which insures you against your living too long by recycling the money from those who die to those who remain. It pays what the fund can afford to pay and is managed either on a with-profits basis (if you trust the discretion of an actuary) or on a unit-linked bases (if you prefer your pension to be determined by an algorithm).

Pensions should stop scheming

As far as paying pensions is concerned, the employer covenant is as good as dead. Employers do not want to manage schemes that guess at how long former staff are going to live, nor do they want to predict the rate at which former staff get paid their pensions. There are some employers who may reluctantly set up a CDC scheme as an alternative to a DB scheme – USS seems to be heading that way with talk of “conditional indexation”  in exchange for a stable funding rate.

But if all that CDC is , is a means of getting rid of industrial disputes, then it really isn’t fulfilling its defined ambition

What CDC could and should be

CDC will be developed not by schemes but by pooled annuity funds which will be authorised not by tPR but by the FCA as permitted links to any investment platform accepting insured funds as investment options.

I see these pooled funds quickly establishing themselves as the “de facto” default option for those wanting a pension not a pot.

I see no reason why such funds cannot be launched today, other than they will need some seeding, which will require some bravery from a pooled fund manager.

The launch of pooled annuity funds , to compete with annuities as a “wage for life” solution for DC savers, will mark the end of the Pension Scheme, but for a handful of DB and CDC schemes. It will mean that people can once again purchase with  their money – a  fund that pays a pension