I reference Terry Pullinger’s dramatic address to the IFoA on Friday in which he called for the room to buzz with “fourth ways and fifth ways” for pensions. Terry was referring to ways of re-imagining DB with a light touch , of providing it with or without guarantees and perhaps as a funded version of an earnings related supplement to the state pension.
Pensions certainly need impetus. The bright ideas in the Mansion House reforms have already got bogged down in interminable debates around permitted links and charge caps. The big picture is being lost in the miasma of COBS and TPR’s pension guidance.
The one bright light at the end of the tunnel is the thought of a new Government with at least five years to plan ahead and think the unthinkable. This was what Frank Field was charged with doing in 1997, though his ideas did not take root, his impetus did lead to the Hutton Commission and to the central mantra of the last 25 years – work longer, save harder. To which we might add – “save smarter” so that we can enjoy pensions that support us through our reclining years
I am still buzzing after Terry’s speech and intend to use his energy to power my blogs over the next few days.
The Government needs a big idea and here is a big idea – State CDC
It’s not my big idea – it’s my friend’s Andy Young who has worked out that everyone should have access to a CDC scheme to build themselves a pension in later life.
Here are my key features, not Andy Young’s but I think he’ll be delighted and annoyed in equal measure. Anyway, it’s the buzz that happens when your mind is released to think like Frank (RIP).
My big idea is a CDC type scheme that;-
- Can be used by employers for AE workplace with reduced AE minimum employer contribution (2%). In line with the Federation of Small Businesses’ suggestion
- The scheme benefits from cost sharing – Government incentives (as per PP contracted out; 1% of band earnings paid to members fund for first five years)
- Target income levels based on aggressive assumptions and 100% allocation to growth assets (as with Coal Schemes)
- No tax free cash but pensions paid tax free to basic rate tax payers, other pay tax at marginal rate
- Administration needs a new approach;- faultless because held on a distributive ledger (blockchain)
- No member options on investment, incentives not to take money early (expressed as deferral bonuses) pension must be taken by 75.
- Pensions paid at CPI standard with no partner pensions
- Transfers in not allowed but people can participate without employer
- Strict rules, GAD is referee – referee’s word is final (no VAR)
A bit more detail
This would be a state administered and invested CDC pension with funds being invested in a national wealth fund – primarily invested in productive finance along the Mansion House lines. Here are some of my heretical ideas – what do you think?
- Employers can choose the State CDC scheme as a workplace pension .
- Employers only need to pay 2% of band earnings
- With the Government making up the difference (1% of band earnings)
- Employers offering State CDC pension will be able to use it as the default, must also offer a DC pension as an opt-out
- Members to get a market related pension set by Government Actuaries who will be responsible for minimising intergenerational issues.
- Minimal optionality for members. No transfers out (like SERPS) but hardship pensions available including lump sums for those on terminal pathways
- The administration will be on the blockchain, members will not have a pot but pension credits , awarded against contributions and annually as investment returns.
- Credits buy pension , pensions declared by Government Actuary based on overall affordability
- The fund is advertised for its works, “state CDC funded” becomes a badge for long term investments. Details of investments publicised. No restrictions but no investment choice
- Available to self-employed and can be used by employees as an additional voluntary contribution to their workplace pension
- Doesn’t offer tax free cash but pensions paid tax-free to basic rate pensioners
Logic
CDC isn’t doing it for large employers and there doesn’t seem much interest from medium and small employers either. The state is trusted to pay pensions and there is considerable interest in buying state pension.
The blockchain is fit for this purpose – a rules based immutable system which cannot be challenged. Requires restrictions on contributions
This is not designed to replace good quality workplace pensions ;- used primarily by SMEs + self-employed to provide pensions. Tax treatment in line with SERPS/S2P but tax-free income a new feature.
The design is about pension not cash. People who want flexibility will be able to opt out into a standard DC workplace pension
Takeaways for further thinking – more buzz.
I agree with my friend Andrew Young in calling for a fresh debate on “What are the objectives of the state in providing and promoting pensions?”
I differ from my friend Andrew Young in detail. He would like to return to a universal second pension, I would like that second pension to be voluntary and incentivised to do different things from workplace pensions.
I favor incentivisation of a State CDC, Andrew prefers mandation.
We already have the means to fund a State CDC (auto-enrolment). I wonder if the existing DC framework strong enough to cope with a second state funded alternative?
Andrew wonders whether the State Pension now adequate as a safety net? Do we need any further intervention?
Andrew asks “Should we have a compulsory state second pension – both funded and providing CDC style pensions ?
Should that be an alternative to the DC workplace pension or a foundation pension for all?
What do we do with the Sovereign Wealth Fund we build through CDC funding?
Should Nest , the PPF and private and semi-public pensions (LGPS, USS) all have access to the same Sovereign Wealth Pool?
Should Nest ultimately become the State CDC plan?