It was interesting being on the Royal Society of the Arts CDC call with the Pensions Minister and a large number of actuaries, lawyers and the RSA team of David Pitt-Watson and Hari Mann.
The DWP put out a press release saying they are bringing forward the consultation on how CDC can reach more people quicker. I’m right behind this.
Guy Opperman is also clear that delivering CDC through a scheme is pretty hard and trying to re-create a DB like pension , offering CPI increases and a high chance of a promised accrual being paid in full, is no easy business. It’s a defined ambition , but one that will take a deal of regulation.
So we now have the CDC code, which DWP’s aficionado, Julian Barker, hinted might be toned down a little for smaller schemes wishing to join multi-employer arrangements. And we have a further consultation on CDC (2.0) due in the autumn with some bullets from the Minister
CDC schemes have the potential to transform the UK pensions landscape and deliver better retirement outcomes for millions of pension savers.
I firmly believe that we should capitalise on the enthusiasm that is building for extending CDC to other types of pension scheme, such as multi-employer schemes and Master Trusts.
I am keen to move quickly, but we must get this right if it is to work. That is why I am calling on all those who are seeking to deliver the full benefits of CDC to work with us to help make this a reality.
Here are some thoughts on whether we’ll get “the full benefits of CDC”. In this post I argue that the full benefit of CDC cannot be delivered using the CDC code. The code will act like an anchor, dragging back CDC schemes that do set up. In its current form it will drive commercial master trusts to other ways of achieving the same end. It has already impacted Royal Mail’s CDC plan which is designed with wind-up in mind.
How the Royal Mail have limited benefits.
Royal Mail CDC is being built with an eye on its closure. For that reason it will not deliver the full benefits of CDC.
Royal Mail’s CDC investment strategy is built around a lifecycle – or perhaps a life to death cycle where each member’s estimated time to death triggers an adjustment to the collective investment policy.
So if everyone was 20 years from death, you could expect the scheme to be 100% aggressive (e.g. invested in growth assets like shares) and if everyone was within five years of anticipated death, then the scheme would be preparing to wind up and the investment in bonds that could be swapped for a bulk annuity to buy out the rump. The lifecycle mechanism is a means for the scheme to prepare for its own demise.
This is “elegant” but it is flawed. It is flawed because the CDC scheme must be anticipating being in what the chart above calls the sweet-spot , where new postal workers joining the scheme as youngsters will counterweight the retired postie, in their final years.
Royal Mail’s Collective Pension Plan lacks the courage of its own conviction and will under-deliver as a consequence. But it will still bring considerably better benefits to postal workers than an equivalently funded DC or DB plan. It will largely benefit from the “Open scheme sweet spot” illustrated below though still suffering from some of the problems on the right hand side of the chart.
The Royal Mail investment strategy will appeal to a risk-averse Pensions Regulator, punch drunk with DB going wrong. It will appeal to the DWP, who have no reason to stick their necks out and demand that a CDC scheme “take more risk”. It will make sense to members and the employer, who may not have the courage of assuming Royal Mail will be running this scheme in 50 years.
No doubt, after a hesitant start, the investment strategy will grow bolder in time, but the Minister must not think Royal Mail is a blueprint for the future, it has knocked down the door and other variants should follow.
Why I am confident the Royal Mail collective pension scheme will last.
We should be asking why a scheme setting out to provide pensions for generations of postal workers to come, has been built with half an eye on failure, and I suspect I am one of the few people who actually thinks that CDC schemes , such as Royal Mail’s have a decent chance of being around at the turn of the next century.
The Pensions Minister recently asked for a bit of vision from the private sector. My vision is for a CDC fund that is independent of employers and which can be used by savers to turn their pot into a pension. But if CDC is to work as an employer sponsored scheme, it will work best with large employers with stable workforces and a culture of pension saving encouraged by all stakeholders.
Because Royal Mail is built to last.
The Royal Mail pensions covenant is stronger than the Royal Mail, it is as strong as our need for good and messages to be delivered to our door,
The need to deliver mail and parcels is not going away over night. Competitors like DHL and Amazon may take Royal Mail over, but delivering items to people’s doors is and will remain manually intensive. There are many things which cannot be automated and people need employment – this work does not go away – nor does the need for the after-work party that retirement should be. There may be changes in management, ownership and personnel, but the idea of a centralised universal post is getting on for 200 years old, Rowland Hill founded it in 1840!
Royal Mail is not unique in having this characteristic. We call such employers “institutional” for good reason, they are built for the future.
Pensions (like deliveries) will be needed indefinitely
Nor is the need for pensions finite. We will repopulate the planet and employers will repopulate pensions. We run a state pension on precisely this basis. The main worry for those running the state pension is to do with fertility and mortality, the rate at which babies replace dead people, that lifecycle hasn’t ever changed.
We cannot work for ever nor would we want to. Especially (but not exclusively) in manual trades, people need to put their feet up at some life stage, call it what you want, people need to and want to retire. To retire, you need the prospect of a replacement income which should make you comfortable, that’s what we work for. Good pensions are a good reason to go to work, it’s why postal workers stick to the job.
I see no reason why a CDC scheme for postal workers should ever have to close.
So why the funk?
I can give a few reasons but they all come back to the current climate of risk-aversion. We are not used to taking an optimistic view of the future. Our view is clouded by pandemics and climate change and we assume that employer’s covenants will fail.
But we find ways to live with Covid, we will find a way to survive on this planet and we will certainly find ways to manage pensions for the next 100 years.
So why the funk?
We are paid to be risk-averse, that’s why.
We are taught to think that our possessions and our careers are throw-away like the items to the right. We do not build for the future as our ancestors did.
I live next door to St Paul’s cathedral. I doubt that Christopher Wren imagined much about London in 2122 when he started work on it in 1667 but it stands a monument to his vision nearly 350 years later. If asked the need for the enormous expense of building in Portland stone and marble he might have replied as Lear did “oh reason not the need”. It has survived because it is loved well.
As it happens, the original building has had to be renovated many times, it has no proper foundations and was built on the expectation that future generations would adapt it to future needs. It has recently had a substantial renovation to accommodate the Covid memorial.
St Pauls , like a good pension scheme, was built to last!