I turned up at the Institute of Actuary’s Hall with little expectation of hearing anything new on CDC. Along with my friends Edi Truell and Derek Benstead, I listened to a number of experts saying the same things as they said last year and the year before. To the same people who came last year and the year before
And then I heard Terry Pullinger who delivered an oration as a panelist that I will not forget. To quote Derek Benstead on this blog
Terry Pullinger, former deputy Gen Sec of CWU, gave an inspirational speech to the meeting this morning. A great pity it wasn’t videoed to post on Youtube.
CDC, flexible DB or fully DB, it is the job of the pension industry to provide pensions for ordinary people. In my opinion, closing schemes, consolidating and winding up doesn’t cut it. Open schemes are what we need, that’s the key criterion of success.
If, despite everything, we have an open scheme providing pensions to past, current and future generations of workers, then we are doing it right.
Pullinger as a young union official
Terry Pullinger’s message was simple and he has said he is happy to be quoted , despite the event being under Chatham House.
“This room should be buzzing with innovation at the opportunities available – I want CDC, I want flexible DB , I want a fourth way, a fifth way, but we’re walking on the other side of the road. There’s a Tsunami of pension poverty coming down the road, be inspired – you can make a difference”
He told us that when he was young, his mates laughed at him for being a postman
Terry when a postman
But now he has a good pension for life and they don’t, he doesn’t have to worry about staying in his house, they are having to sell theirs. Terry’s job carried a good pension and he has fought tooth and nail over the past decade to make sure it stays that way.
There could be no better explanation of why we fight for pensions than Terry Pullinger’s and I am very proud to have been in the room for that speech, it will keep me fighting for many a year.
A bright light in the darkness
What followed was pretty dire, an academic from Herriot Watt University told us that “equities were gambling” and showed us some charts that showed that pooling of risk led to better outcomes and that “non-diversifiable risk does not go away in CDC – because all CDC schemes have to close some time”
A Government spokesperson told us that we could look forward to another consultation over the summer on multi-employer CDC so that employers like the Church of England can have the option of a CDC scheme in 2025 (perhaps). He was hopeful that Royal Mail would have a CDC scheme by the end of the year.
An actuarial consultant explained why individuals as they got older should de-risk CDC schemes into defensive assets. Presumably because all CDC schemes have to close some time.
Nobody stood up and said that there is no more reason for a CDC scheme to close than for the State Pension to close. So long as there are people in Britain there will be need for retirement income, so long as there are employers prepared to pay into their pensions there will be sponsors and even if there aren’t CDC should be for everyone. Pullinger called for CDC for the self-employed, this blog has been arguing for 15 years that all you need is a pot to have a CDC pension.
As with so many other meetings on CDC, the assumption of failure overwhelmed the positive innovation. We heard how CDC could help save the planet, but none of the speakers , apart from Pullinger , pointed out that for those with limited resources, CDC could produce at least 30% better pension outcomes than a DC plan converting to annuity or drawdown. Indeed WTW have in the past , stated the upside as an increase in lifetime pensions as being as much as 70%.
It was left to Pension Oldie , on this blog, to point out on this blog that CDC doesn’t have to target the accrual of a typical DB plan (as Royal Mail’s does).
You don’t need 9% to make CDC work, CDC will provide the promised outcome provided the actual investment return matches or exceeds that in coverage funding assumption. CDC would work with a 1% investment return. Why should a collective arrangement expect to achieve a lower return than an individual arrangement with all its cost penalties, management responsibilities placed on the individual, and no sharing of risks?
For employers with limited budgets, or savers with limited pots, CDC still works. Indeed “flexible DB still works”. People can exchange pots for DB pensions without the need for a consultation in 2026 with the prospect of CDC decumulation in 2027. But right now, CDC is so chicken that RM’s CDC scheme has yet to offer a transfer-in option.
The Federation of Small Businesses has said it would consider offering a CDC scheme if it was commercially viable, so that its members could get more for less. The FSB is looking to run CDC at less than the current minimal 8% of band earnings rate, with the prospect of better outcomes even from reduced employer contributions. This may not be what the people in the IFoA hall have in mind, but it does acknowledge that CDC delivers value for money in a way that DC options don’t.
As the opening speaker put it. A DB or CDC scheme offers you a car at retirement, a DC scheme offers you the car parts (and no instruction manual). Forget the stochastic modelling , people want pensions done for them.
The light that cannot go out
The light that burned brightly in 2018 has been dimming ever since, I sat with Derek Benstead and Edi Truell and vowed it would not go out. If we cannot give people a wage for life from their pension saving through CDC, we will try another way, a fourth way and maybe a fifth way till we can. We will not let the light go out but will continue to buzz with innovation till everyone with a DC pot has the right to a DB pension.
This blog is written in tribute to Terry Pullinger and to the indomitable spirit that resides within him. It is great to see him back and restored to the great force for good, he has been all these years.
Innovation is a fragile flower. Thank goodness for Terry inspiring us to KBO.
In 2018, the then Pension Minister, Richard Harrington, asked Luke Webster and I to ‘think the unthinkable’ and provide DB for the long term. Thus Pension SuperFund was born. The DWP consultation took 5 years to publish, as part of the Mansion House Reforms. We were good to go – at last – and yet that call to arms was met with two more ‘consultations on consultations’. Nothing has emerged from the TPR that makes superfunds workable. So we have Pension SuperHaven and Capital-Backed journey plans instead. And yet TPR are still nervous of actually doing anything. ‘What if it goes wrong, despite being better capitalised than insurance?’
It would be so good if the pensions world could see that if done properly, it can go so right. Productive investment leads to productive pensions. Whether it’s the Canadians; or the 11.7% p.a. over 24 years my family’s pensions have made; or the London Pension Fund doubling over 7 years…
Time for ACTION!
I just posted this in the wrong place so forgive the duplication.
I was impressed by the returns Edi mentioned today at 11.7% over 24 years. Twice the average returns over the same period for pension fund according to the Savings Association. Is this not the holy grail with a return in excess of inflation that we seek? Was this achieved with liquidity as well?
I would love to understand the mechanism. I am coming to Wimbledon to watch the tennis on Tuesday 9th July I will come a few days earlier if it is possible to meet to discuss.
Try this for a model (guarantees borrowed from the Auto-enrolment Regulations 2010 for DB Schemes) and assuming minimum auto-enrolment contributions of 12%:
Core Guaranteed Benefit:
• Annual pension at NRD of 6.95% of contributions paid in the year (NB: equivalent to 1/120th of relevant earnings).
• Minimum Rate Revaluation pre NRD of lowest of CPI, RPI, or 2.5%
• Pension increases in payment of lowest of CPI, RPI, or 2.5%
• Surviving spouses/dependants’ pensions of 50% of Member’s benefits
Additional Uplift to Core Guaranteed benefits granted by Trustee conditional on surplus in a triennial asset based valuation reflecting achieved returns on the Scheme’s assets being used as discount rate:
• Pension in payment increases up to CPI/RPI
• Pre NRD revaluations up to CPI/RPI
Additional non guaranteed benefits granted by Trustee, determined by surplus after benefit uplift in a triennial asset based valuation reflecting achieved returns on the Scheme’s assets being used as discount rate, with a risk buffer withheld:
• Additional accrual to accrued benefits – which can reduced if a subsequent valuation shows a deficit.
• An annual “Christmas Bonus” paid to pensioners with no onward commitment.
Cash Equivalent Transfer Values offered pre-retirement
• Based on Core Guaranteed benefits and uplifts
• Plus a proportion of the additional non-guaranteed benefits granted to date (TBC – say 75% to reflect loss of risk sharing to Scheme as well as possibility of subsequent loss )
• Calculated using the asset based discount rate
Given the valuations are effectively reflecting a cash flow basis, investment decisions can be made against the required discount rate. If for any reason opportunities don’t exist which offer prospective returns in excess of the discount rate, net new funds and maturing term investments should be held on a cash or cash equivalent basis until either such opportunities exist or the discount rate assumption has been re-appraised and non-guaranteed benefits adjusted accordingly.
There is no need to consider scheme discontinuance (after all the PPF is assumed to run-on in perpetuity). If for any reason the Scheme should not be able to run on the assets will always be able to support the uplifted guaranteed benefits and at least the CETV transfer values to a successor arrangement.
Hi Henry,
It’s always interesting to read your opinion and I hope you keep doing it!
However, I have a few corrections to make to this paragraph, where you claim to be quoting me:
“What followed was pretty dire, an academic from Herriot Watt University told us that “equities were gambling” and showed us some charts that showed that pooling of risk led to better outcomes and that “non-diversifiable risk does not go away in CDC – because all CDC schemes have to close some time” ”
Corrections to these quotations/items related to me:
1. I did not claim that equities are gambling. I claimed that many people view them as gambling. (But certainly not me.)
2. Yes, non-diversifiable risk does not go away in CDC pension schemes – that is clear. However, this is *not* because CDC schemes have to close some time, and I did not claim that! Even if schemes stay open forever, there will still be non-diversifiable risk.
3. It is Heriot-Watt University (only one `r’).
Best wishes
Catherine