I am going to an event this afternoon organised by the Royal Society of the Arts (RSA) and hosted by a famous city law firm. Our agenda is how we move risk sharing on from the one (almost) achieved example, Royal Mail, to more general adoption by employers and savers.
That is the kind of language you use when you are discussing such matters with lawyers and actuaries who form the bulk of today’s meeting. And of course the conversation will be punctuated by the acronym CDC which is now shorthand for what Royal Mail did , but little considered outside the narrow confines of “policy”.
If risk sharing is considered by the general public it is considered by its absence
“where’s my workplace pension?”
is a reasonable enough question for a saver to ask when he/she reaches the normal minimum retirement age or the notional scheme retirement age or the state retirement age.
calls the annuity broker. We may return as a result of the relaxation of QE and the adoption of QT to higher annuity rates but they are still only catering for one in ten of the retiring population.
There is substantial support for not using the word “pension” in connection with workplace DC saving – apparently it puts people off. In my experience people find the idea of a pension very appealing, but they struggle to find a way to convert their savings into a sustainable income for life. It’s not the pension but the lack of pension, that puts savers off.
And is this surprising when we look at the evidence of what is happening to our savings.
The FCA’s retirement income study tells us that most people are drawing down as they see fit. The FCA has launched a thematic review as to whether advisers offering drawdown advice are meeting their consumer duty. The cost of drawdown can be as high as the recommended rate of drawdown.
Meanwhile, the vast majority of pots are still too small to merit the attention of anyone offering a pension and are therefore cashed out, even where cashing out is inefficient tax-wise and defeating the objectives of the pension system and the incentives offered to save for a pension.
In short, the current pension landscape does not include workplace pensions. We get the state pension, if we are lucky we get a works (DB) pension and we get a pot of money that is from our additional voluntary participation in workplace retirement saving. We are not offered a pension.
A just settlement?
Let’s look at this through the lens of big government and the eyes of the Minister for Pensions, Laura Trott. She thinks that the difference in pension opportunities between those who get a DB pension paid with some inflation protection for the rest of their (and their spouse’s life) and the opportunities from a DC pension pot (the investment pathways) do not represent a just settlement for those in their fifties and sixties looking to set up an income in retirement.
Which is why she is keen to get CDC back on the table and why she has hurried the next CDC consultation out. The consultation is flawed because it assumes demand for risk sharing from employers where no such demand exists. If employers wanted to set up CDC schemes , they would be saying so. But no employers are saying so. They are saying that if the conditions were right to risk share (or more properly make risk-sharing easy for their staff to do) they would be happy to be involved. The evidence for this is a WTW conference where I suspect there was considerable peer pressure for delegates to say “interesteed” but I suspect that most large employers would signpost a CDC scheme if one was available.
But most large employers signpost annuities and financial advice and most people with pots do their own thing. There is no impulsion for the employer or the saver to move towards a non-guaranteed pension arrangement (the OECD’s term for CDC decumulation or “pension” as the person on the Clapham Omnibus would call it.
What’s more, the barriers to setting up a CDC scheme , either as an employer or as the commercial funder of a multi-employer master trust are immense. Applicants are expected to pay high fees, subscribe to complex rules, employ legal , actuarial and investment advisors and accept the risks of a regulator exercising its powers if things go wrong.
Unless the prize is an alleviation of strain on the balance sheet (as with Royal Mail), no employer is going to voluntarily subscribe to the CDC Code without an alternative incentive. Assuming that employers see the problems facing people turning pots to pensions as their problems , is fanciful. Employers have been there, done that and are still paying the price as they struggle to ride themselves of their unwanted DB legacy,
There are people wanting to assume pension risk and they are called insurance companies who are busy buying out the DB legacy and promoting individual annuities at the new QT rates, but what they offer is risk transfer, not risk sharing and the price of risk transfer is too high for most savers who want a pension conversion rate closer to 8% than what an annuity offers.
So there is no just settlement and it is hard to see what will change with the current consultation.
Will pensions ever return for DC savers?
The answer is “yes” – but on the following basis’
The individual is paid a non guaranteed pension from an arrangement managed commercially.
That arrangement would be arms length from the employer and would be signposted to savers as the “done for them, wage for life default”
Whether operated under trust or under contract, the arrangement would be established under rules agreed by DWP and Treasury and regulated by TPR and FCA. The CDC code is not fit for this purpose though there are aspects of it that can be adapted.
Finally, there need to be incentives for commercial entities to create these new arrangements. They could be tax-incentivised, they could be incentivised by being auto-enrolled and they can need to be promoted not just by DWP but the Treasury as a sustainable part of the pensions infrastructure.
We have seen a recent DWP initiative, the pension superfund, hit the rocks because the PRA, BOE and Treasury did not lend it support. No commercial provider will embark on launching a CDC fund without the overt support of all parties. We are still waiting a DWP response to the 2018 consultation on superfunds, we may wait as long for action on CDC, unless we get cross-departmental support.