Old School and proud of it
I had a chance to meet with the Minister for Pensions in this year and she asked if there was anyone she should trust for an honest , unbiased and saver-centric view of pensions. I answered – Andy Cheseldine.
Andy is a very old school kind of guy, though he has worked in the rough and tumble of financial services,(he served a time at broker Frizells), he is a studious and serious man whose judgement I value. Lately he has become expert in occupational pensions and his time at Bacon and Woodrow and LCP has coincided with a period of my career when I have been involved in the development of occupational DC pensions.
He is part of a small group of people who worked with Kevin Westbroom at Bacon and Woodrow that includes Andrew Warwick-Thompson, Simon St Ledger- Harris, Sally Bridgeland. Andy Cox and the very maverick Steve Mingle. Sally and Steve have mainly worked in the Defined Benefit world but most of crossed over and risen to prominence for their strong views on how DC pensions should be organised. It is the old school and none the worse for that. Indeed it forms the platform from which innovation can build.
Andy and Andrew Warwick-Thompson are the principal articulators of this old school , it has created the consultancy model that has driven the Pensions Regulator’s view of DC.
The consultancy model of VFM
Andy Cheseldine articulated the consultancy model on this week’s VFM podcast – where he was in conversation with Nico Aspinall and Darren Philp.
You can listen to it here along with others on the theme. For those (like me) not familiar with familiarities – Andy Cheseldine is here known as “Chezza” – harrumph.
The consultancy model is very different from that put forward by the DWP in its consultation. It is a model that looks to build a model that embraces complexity and found its gorgeous apogee in the Pension Regulator’s late (and unlamented) “31 quality features of a DC scheme”
Any analysis that requires 31 factors to be rate on a scorecard can only properly be managed by a consultant which is why consultants have fared so well with TPR (and so badly at the FCA). Add to the list of former executives at TPR David Fairs and you can see how a small group of actuaries, lawyers (AWT) and technicians have dominated the conception of what is good in DC this millennium.
The consultancy model has applied DB thinking to DC problems to give us
- Lifestyle – the idea that by shifting into bonds and cash we can match our assets to the liabilities trustees should discharge on claim (the payment of cash and annuity)
- The concept of a gilt of bond as a “low-risk” asset. Founded in DB thinking based on marked to market liability valuations
- The concept of trustees as decision makers – based on the mutual model of occupational DB schemes operating at arms length from the sponsor
- The paternal model of member empowerment – based on encouraging good behaviors (save more for longer)
- Sponsors whose principal job is to pay more into the scheme to pay adequate pensions.
I doubt that anyone sees any of these ideas as contentious, listen to Andy and Nico chatting and these concepts still underpin the conversation.
The ambition of the old school consultancy model is to include the investment aspirations of DB consultants into a DC world, here diversification into private equity and other illiquids is a badge of honour but it is confounded by the DB conception that such assets must be liquidated to pay claims at retirement (Andy mentions at one point that the biggest pots are for those nearest retirement making illiquids “hard”)).
Here we have a fundamental problem with the consultancy or DB model of defined contribution pensions. They are assumed to fail as pensions.
So in designing an investment strategy, actuaries will assume that the growth assets go into the early stages of accumulation and are then swapped for defensive assets because the member will claim at some point after the minimum retirement date and certainly no later than the scheme retirement date (the date lifestyling or target dated funds aim at).
But the reality is that most people cannot afford to swap pots for pensions using annuities and therefore cash out their savings in trust based DC plans either to switch to SIPPs or to their bank accounts and ISAs. The only part of the pension that people “own” according to Janette Weir of Ignition House – is the tax-free cash, as it is the only part that represents a clean settlement. For the rest, pension pots represent the uncertainty of punitive taxation or the uncertainty of drawdown.
At one point in the podcast “CDC” is mentioned (I think by Nico) but it is put back in pandora’s box because the idea that a DC pensions might not need to de-risk, become bond and cash-centric and liquidate creates a challenge for the consultancy model, which is that DC might succeed in paying pensions. That is not what the consultancy (DB) model is about. Both in DB and DC – the payment of pensions is someone else’s business.
This prejudice is engrained into the DC thinking of DC trustees and therefore of the Pensions Regulator, but it is there to be challenged and I believe will be challenged by a new school of DC thinking that I see developing out of the great work that the old school has done.
As Yeats wrote in Sailing to Byzantium
Nor is there singing school but studying
Monuments of its own magnificence;
And therefore I have sailed the seas and come
To the holy city of Byzantium
Andy Cheseldine has created the monument of DC’s magnificence in his work as Trustee Chair of Smart and Lewis Master Trust and in his influence on the perception and measurement of qualities of good DC schemes.
But he is also open to new ideas, he opens the doors to those who come, to the holy city of Byzantium. Which is why I suggested to Laura Trott, that she spoke next to Andy Cheseldine.
