Frank Field and Stephen Timms

I’ve had the pleasure of listening to Stephen Timms talk twice in two days and not only does he deliver what he has to say with dignity and feeling, what he says has a humanity about it that reminds me of listening to Frank Field.

That to me is a high compliment, Field was Timms’ predecessor as Chair of the Work and Pensions Committee and brought to his events a theatricality , good humour and occasional asperity that cannot be replaced. My prayers are for him.

Stephen Timms’ has the benefit that Frank Field never had of being embedded in a serving Government in positions of power. Though Field was the Minister of Welfare Reform in Tony Blair’s first Government, he was neither understood or accepted. After leaving office Blair said of him in his autobiography

The problem was not so much that his thoughts were unthinkable as unfathomable.

Stephen Timms thoughts are fathomable and they will resonate around both the Treasury and the DWP, for he is liked and respected in both departments.

For much of the recent lengthy inquiry into pension freedoms, I have been a little disappointed by the focus of the debate which has concentrated on ways to engage us with the difficult choices ahead, rather than finding ways to make choices easier.

But that is changing and in the two speeches made by Stephen Timms, reference has been made to perhaps the most radical proposal made within Westminster since George Osborne announced “nobody will have to buy an annuity again.

I’m quoting directly from the publication detailing the DWP response arising out of the report on “protecting pensions savers- five years on from pension freedoms“, a document which is worth reading twice.

Recommendation 6: For CDC schemes to provide a realistic alternative to annuities, people with defined contribution pension pots need the option to be able to transfer
to decumulation only CDC schemes. In future these may be available through mastertrusts regulated by the Pensions Regulator.

We recommend that the Financial Conduct Authority consider whether there is also a case for developing contract-based CDC
schemes and publish its findings.

Government response: We understand that the FCA will be responding to this recommendation separately.

In that final statement from the DWP , there is the potential either for the door to be slammed on CDC for retiring savers, or for retirement savings to be transformed. Let me explain.

To date, the view of collectivisation, has been based on organising the saving and spending of retirement money around employers through “schemes”. The word “scheme” appears many times in both the Pension Schemes Act and in the Pension Regulator’s CDC code.

But a contract based plan is not a collective arrangement. The contract is between the pension provider (usually the insurer) and the policyholder (saver). It is an individual arrangement. Where collectivisation happens within contract plans is within the funds offered on the contract plan’s platform. These “pooled” funds are collective arrangements bringing together the interests of any saver, whether that saving is through an occupational or a personal pension.

The only way that a contract based CDC arrangement can be delivered is through a pooled fund. So the question that Stephen Timms is asking is whether CDC can be delivered through an investment fund which effectively provides drawdown with pooled longevity.

I have written about such funds on this blog and today I will be explaining to the DWP how they might be created, seeded and operate, as an “alternative” to scheme based CDC.

Here is the big ask. CDC delivered to individuals is not being delivered as a take it or leave it scheme (as is the case with Royal Mail) but as an option for savers. It is an option that could be used as easily by trustees of an occupational pension (as part of a trustee investment plan) as by the managers of a personal pension (now commonly known as SIPP) plan. It could as easily be offered to savers in the Hargreaves Lansdown Vantage SIPP as Nest (for instance).

And here is the real challenge for the DWP.  If as is generally argued, contract-based CDC is – by dint of improved investment returns, lower capital requirements and the positive impact of longevity pooling able to deliver a 30% higher return than an annuity, then what is the downside for DC providers, employers using DC workplace pensions and savers with pots rather than pensions? What is the downside of simply using a CDC retail fund rather than setting up or joining a CDC scheme?

Is CDC a workplace pension or a pension fund?

This is a subtle question and I may not have phrased it right (I am still in the early days of working out how to frame things).

The DWP and Royal Mail’s vision of CDC is as a workplace pension which provides a wage in retirement to workers based on service and earnings. Contract based CDC , as suggested by Stephen Timms is a fund that converts existing savings to a pension , that is paid at a rate (depending on formula or discretion) that depends on the investment of the fund.

So it would be possible for a DC scheme to offer a CDC option through a CDC fund.

I am sure that I have said enough to excite those who read this, of the opportunity for the DWP and TPR to work with the Treasury and the FCA towards a resolution of the current difficulties that exist over the adoption of the FCA’s investment pathways and the roll-out of DWP’s CDC program. There is an opportunity over the next two years for the DWP to embrace pooled funds as a way of converting workplace pension pots to pensions and the FCA to embrace workplace pensions as a way to distribute retail CDC funds- both through workplace GPPP/SIPP and through sole and multi-employer occupational schemes.

The skill of Stephen Timms

I hope that I am right and that what follows is constructive. I may be wrong and the FCA and the DWP may kick the idea of a contract based CDC fund into the long grass. But I only see that as happening if politics prevails over member outcomes.

If I am right, the opportunity is that the enabling legislation and the CDC code continue to be relevant for those employers who want to run CDC schemes and that the existing pooled fund regulations (permitted links) can be used to ensure that savers with DC pots can have access to the advantages of CDC (or chose not).

This would bring us in line with the Australian model , where there will be , from July 1st, there will be an obligation on retirement plans (Super) to offer a retirement income option in whatever way they see fit. The point of Australia’s Retirement Income Covenant, (and I hope UK  CDC),  is the promise (covenant) that all members will be able to simply and effectively be able to turn their pot into a pension without buying an annuity.

Thinking the unthinkable – Stephen Timms’ style.

Frank Field

Stephen Timms -WPC Chair