The headline says everything that is right about Willis Towers Watson’s intention and captures the problem it is facing. The DC saver needs a simple way to turn their pot to a pension, but breathing life into “CDC or “Collective money purchase” or whatever, is like getting blood out of a stone.
The only phrase for what CDC delivers that makes sense to me or to the general public is “wage for life”- coined by Terry Pullinger of the CWU to explain to postal workers what they’ll be getting that they weren’t getting from the Royal Mail DC plan.
“Putting the pension into the workplace pension”
Simon Eagle, Shriti Jadav and Edd Collins are our best hope of getting something over the line in 2023. Willis Towers Watson have the muscle will and expertise to turn the barren ground into something fertile and I am full of praise for them.
But they must be realistic, nothing’sgoing to come out of the CDC code established by TPR, it is simply there to help Royal Mail. I see no other applications from employers to set up a CDC scheme nor anything in the media that shows such intent. Nor do I see any real endeavour from master trusts to deliver a “wage for life” solution for their staff either by converting to collective DC or by setting up a decumulation only scheme specifically for members. Willis Towers Watson has in Lifesight , one of the largest multi-employer DC schemes, but I have not seen any evidence that it is preparing to bring CDC to life (the same can be said for Aon).
No occupational pension scheme other than Royal Mail’s collective pension plan is showing any enthusiasm for Guy Opperman’s vision
“Ultimately” may be too late for the millions of people who have passed the normal minimum retirement age since 2015 and themselves without a default way to turn pot to pension. Enthusiasm for the pension freedoms has not translated into a mass celebration of the workplace or non-workplace pension, voluntary savings rates have remained static, it is only auto-enrolment that is keeping the DC show on the road and once the “windfall” of the DC pot has been enchased, the “saver” has nothing to show from the workplace pension than a healthy bank balance.
According to the FCA’s retirement income study, the average “saver” reaches the point at which they crystallise their savings with £60,000. That figure – once we have got over the disaster of the bond crash – will grow. But drawdown and annuities are the only options for those who want an income from their savings and WTW make it clear that neither is fit for the purpose of being the nation’s “default” option.
So what is WTW’s plan?
Simon , Shriti and Edd are clear they don’t yet have the answer and their plan is to socialise this . Polling conducted at the WTW Pensions and Savings Conference held on 1 December 2022 indicated that 93% of the audience (WTW corporate clients) see a CDC pension as of interest to members. But clearly these clients are not wanting to do CDC for their staff, they want it done for them – otherwise we’d be seeing applications for CDC arriving at the Pensions Regulator.
WTW believe that the Regulator can bring CDC to life
The Government is now working on extending the legislation to allow a far broader spectrum of CDC pension schemes to be set up and is engaging with the industry with a view to consulting more formally on its plans early this year.
The regulations need to be extended to facilitate commercial master trusts and decumulation vehicles, and ideally also to remove various constraints within the existing regulations to give flexibility for the industry to develop innovative new designs that will work for decumulation.
I’m sorry but this touching faith in more regulation sorting things has no evidence base. In fact the CDC Code is so intimidating commercial master trusts take one look and say, not again. They have been through master trust authorisation and the appetite to spend large amounts for the right to build a speculative CDC arrangement is not appetising.
If not the master trusts – who? There is no reason why occupational DB pension schemes cannot pay “scheme pensions” with DC money, but those scheme pension s will need to be guaranteed and are not therefore CDC pensions. The simplest thing the Pensions Regulator could do is to allow all occupational pension schemes (and the PPF) to offer DC savers non-guaranteed scheme pensions paid along the lines of the Royal Mail’s wage for life solution. Is that likely? I suspect not – judging by the refusal of TPR to approve the Superfund, judging by the draft DB funding code and judging by the recent desertion from TPR of its CEO and its Head of Policy.
Innovation from outside
“Inside” pensions, for WTW- is the world regulated by TPR and legislated by the DWP. There is little or no prospect of CDC coming to life inside pensions. WTW are going to have to look outside this bubble for a means to make “CDC happen”.
The OECD’s recent paper (chapter 5) talks not of CDC schemes but of non-guaranteed annuities. If you offer someone an annuity that is not backed by an insurance guarantee you are offering a wage for life powered not by gilts but by long-term growth assets.
This is what is being done in Canada with “dynamic pensions”, in Australia at Q-Super and it’s what could be done in the UK – WITH NO FURTHER LEGISLATION AT ALL.
“Just” has even built and priced the product. What is stopping CDC coming to life is the expectation that TPR has the answer. Even if TPR was to adopt a facility for occupational pension schemes to offer non-guaranteed scheme pensions, there would needs to be legislative change and the cycle would mean nothing coming to life – probably in this decade. Innovation has to come from outside.
The hope from WTW
WTW is our best hope – as mentioned before – but it needs to reach out to innovators outside TPR’s perimeter. Their team has promised to meet me on this but in the last three months I have heard nothing. Their paper reaches out..
We all need to play our part to ensure that CDC doesn’t remain a just a great idea in theory but is really brought to life and made into a reality for everyone. We’re seeking to play a part in this and hope others will join us in doing so – we look forward to working with people across the industry to help really cement CDC as a third option for pension provision in the UK.
But if WTW are to deliver, it cannot be just by “engaging with the DWP”, the solution to the problem created by the Treasury in 2015 needs to be found with the Treasury in 2023. The FCA and PRA need to be brought into the solution and accept the idea of a “wage for life” – non-guaranteed pension.
There is a very simple and low cost way to turn individual pots into pensions: invest in mortgage bonds, mortgage annuity payment pays pensioner annuity. Too simple for the industry, hard to charge fees!
You say this, Arjan, on the day that the Financial Conduct Authority warns that more than 750,000 homeowners are at risk of defaulting on their mortgage payments in the next two years. The FCA also say that 200,000 mortgage holders had fallen behind on their home loans up to June of last year.
There is hope. Recent (independent) conversations with a range of senior people across the Consultancy world is giving hope that there is a growing consensus that the current approach (ie closing DB, and forcing the rank and file into self-investing non-supported DC) is just not right on many fronts, and will not for many deliver a ‘wage for life’ in retirement. There is also a growing acceptance and understanding that any nation economy that predominately self-invests in its own govt debt, rather than market led growth and innovation, is doomed to failure and is in effect flushing its wealth and prospects down a vortex of doom.
There are some great minds with good intentions across and leading the major investment and consultancy firms, and rather than feed into and off of the status quo we need them instead to turn their ingenuity into creating new ways and solutions to build and spread the case for collective pension provision – and one that is routed in innovation, investment and growth. CDC is a good starting place, and something that can look to deliver that ‘wage for life’. But like all innovation it will be stifled by over-regulation. Statism won’t work here – the DWP and TPR need to back-off from this one and allow innovation to take a hold to find a solution to the problem. The genesis of the legacy DB schemes were not bolstered by regulation – they flourished because enterprises had to solve a problem – to find ways to recruit, reward and retain a workforce in previous times of scarce labour resource and when inflation fears (including wage controls) were rife. Seems to me we may be able to learn something from previous times.
Thanks for the comments