This morning I published David Pitt-Watson and Hari Mann’s FT article on CDC
I did not do so with quite my usual gusto- and I have been asking myself why I, a long-standing enthusiast for CDC, have become jaundiced over the direction it has taken since the announcement by Royal Mail that they would be running a CDC scheme – five years ago.
Swimming against the tide
I’ll start with the fundamental point. CDC as it has been designed and legislated for, is a workplace pension scheme. the title of the David Pitt-Watson piece is “Rewrite the rules of the UK private pension system”. But the UK private pension system is no longer about employers providing pensions, pensions are on offer from a few employers to those staff who are still eligible to accrue a defined benefit. But the number of staff sill accruing has shrunk over the years and a lot of the accrual (including what is currently going on for DB members of Royal Mail) is towards a “cash balance” rather than a pension.
So in trying to provide staff with pensions, Royal Mail’s CDC plan is swimming against the tide in aiming to provide its staff a pension rather than pension freedoms.
What do people want from their employers?
The dismantling of the structure of the UK pension system over the past twenty years has been achieved with minimal industrial action. Unilever staff striked, the USS lecturers strike, Royal Mail staff would have struck, but pension strikes have been few and far between. Employers have found that switching from a defined benefit to a defined contribution structure has been rather easier than many in human resources thought possible.
Part of the reason for this was that change was staged, first it was new hires who were excluded from DB scheme, then the scheme closed to future accrual, latterly schemes are being packed off to specialist buy-out insurers who secure benefits with the backing of the current Solvency regulations.
But more importantly, people do not seem to have minded the loss of a pension promise and seem to have been content with (financially at least) a much inferior promise of a pension pot. Despite the assumption from many actuaries and lawyers that people taking a cash-equivalent transfer value are at best being poorly advised and at worst being scammed, that is not how the people who have taken CETVs think about it.
SJP now has 300,000 people in pension drawdown, it is taking over both from the scheme pension and the annuity as the way most people pay themselves a retirement income and the rate of drawdown is set – not by an actuary – but by the person taking the money.
Not to put too fine a point on it, people value their personal freedom rather more than being told by their employer how they are going to be paid in retirement.
Employers aligned with staff in wanting pension freedom.
There appears to be little moral imperative amongst the executive boards of UK private companies to pay a replacement income to staff targeting 2/3 final salary. This is no longer part of the employer’s reward strategy and certainly high on the shareholder’s wish list. ESG does not contain a social objective to pay pensions. In the private sector (as opposed to the public sector) the payment of pensions is no longer part of the employer’s DNA
“Paying staff so they can afford to stop work” is very much part of the strategy. Facilitating saving into workplace pensions through matching, salary sacrifice, sidecars and share-save schemes are well-being strategies that are aimed firmly at making staff sufficiently affluent to work as they please in their fifties , sixties and later.
The private sector’s supine acceptance of the withdrawal of future DB accrual has been achieved because neither employers or employees wanted guaranteed pensions enough, and many wanted pension freedoms more.
But this does not mean there is no place for CDC
Personally , I feel uncomfortable managing my own wealth, setting my drawdown rate and hoping I will live long enough to enjoy my retirement but not too long to run out of funds.
I know there are many like me, who would happily swap our right to do what we like with our money for a promise of income for life- for which we have to do no more than keep our bank accounts open!
I am prepared to accept uncertainty around the level of increases in my retirement income (as we have had to do as inflation has picked up). I am even prepared to accept that some years I will have to take a “pension pay-cut”, But if I know I am assured that my money is being managed as part of a common pool, replenished by new people joining and older folk dying, I am happy.
The precise mechanics of the CDC fund, I swap my DC pot for, I can leave to others. That is what we pay insurance companies and master trusts to do. I want CDC as an investment pathway I can follow after retirement as an alternative to buying an annuity or setting my drawdown. Frankly I think most people are like me, looking for a default option which will allow me to get on with my retirement knowing I am being taken care of.
Is this decumulation only CDC?
Well sort of. I suspect that the kind of CDC that David Pitt-Watson and Hari Mann have in mind, harps back to a world where employers ran their own schemes (rather than participating in master trusts), paid pensions – rather than into pots and aligned the pension scheme retirement age with the end of work.
But employers and work are not like that anymore. Employers see the choice of a CDC pension as the employee’s choice not theirs. Decumulation only CDC is generally seen as a “scheme option”, something that master trusts might embrace to maintain assets post retirement. But this is not thought through.
Actually, CDC is a pension that is payable from a fund that can be seeded from workplace DC pots or DB CETVs – or AVCs or SIPPs. There need be no employer involvement, no scheme involvement, there needs only be a CDC fund into which an individual can transfer their money .
I’m arguing for taking CDC out of the hands of actuaries and lawyers and making it a choice available to everyone. That would “re-write the rules of the UK pension system”
I had two conversations with pensioners in my local working men’s club yesterday afternoon – we were there to sketch out the events programme for next year. I took the opportunity to ask a few questions. Of those with company pensions, 18 out of 21 were positively inclined towards their former employers, and would accept a 10% cut in their pensions if that avoided sponsor insolvency and the loss of jobs associated with that. The most telling though was an individual who had run a corner shop and had a savings pot in drawdown; he said that his choice on retirement was to buy an annuity that paid so little he would have been in financial difficulty forever, and growing worse, as the terms of indexed pensions were far worse, or live with the perpetual worry that his pot’s value would collapse in a puff of a market whim, and that he would then be unable to continue drawing and leave some provision for his wife.
People need to live to learn with volatility. If his pot collapse in a puff, so the CDC pot. There is no difference. “Stealing” from younger members (subsidisation) would be wrongz
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