There is a lot in the press this week about pension innovation, some about Pension SuperHaven, but most – rightly – about the opening of Royal Mail’s CDC plan – on Monday (7th October).
It’s taken 6 years for Royal Mail to open its schemes to corporate and staff money and my congratulations to all involved from start to finish. This is undoubtedly the right solution for Royal Mail.
To me , the real innovation for Royal Mail is in “risk-sharing”, The idea that a group of staff can share risk between themselves and between those retiring, those working and those yet to come into the workforce is a huge leap of faith. It has been derided by those who think we won’t have a Royal Mail in ten let alone sixty years, but the pension is a statement of corporate intent – as well.
Royal Mail’s Collective Pension Plan has had to overcome many challenges. As Guy Opperman has consistently said, you need to get things right first time and those who have legislated at the DWP (and to an extent HMT) and those regulating in Brighton have had to find innovative solutions to problems they did not know they had.
Royal Mail has shown a patience in its negotiation with the legislators and regulators which comes with the patience of a legion of actuarial, investment and legal consultants.
All of the effort will seem worth it on Monday when the patience pays off. I congratulate all parties to this deal.
The pace of change must change
However, all parties are agreed that the pace at which innovation happens must increase. The dashboard is late, superfunds are late and CDC is still to see alternatives to the whole of life singe employer model of which Royal Mail’s Collective Pension is the sole example.
If you compare the speed of change in banking and payments, the use of innovation sandboxes, the adoption of financial technology, the adoption of open standards and the collaboration that has brought us “open banking”, “faster payments” and the management of personal finance through hand-held devices, then you wonder at the lag with pensions.
I am involved in pension innovation through Pension SuperHaven and in my dealings with the Pensions Regulator I have noticed a new “need for speed” with the impetus coming from Brighton. I do not want to rush the opening of Pension SuperHaven to savers, reputations are quickly lost , but I am impressed that I am being asked to move at speed!
I have promised not to blog about the details of the process we are following to agree the detail of the Pension SuperHaven offering but I am pleased that we are on our way. It may take time to create understanding, understand how we fit into the regulatory landscape and to satisfy all the parties who backstop pensions of the sustainability of the offer. But we are building on years of work on superfunds and continuity in terms of intent.
It took just over 27 months to create the PPF. From nothing- to opening its doors to the first claim. The creation of the PPF is an object lesson in getting stuff done.
The need must drive the pace of change
There is a general recognition that the great risk transfer that was driven by the withdrawal of corporate sponsors from guaranteeing DB pensions, has flaws. Transferring risk onto savers to provide themselves with a wage for life needs more than the annuity. The defined ambition project that accompanied the introduction of pension freedoms was supposed to bring innovation to the market. In practical terms it spawned Royal Mail’s Collective Pension but little else.
The silent majority who do not have advisers, cannot do long term cashflow matching and have no control of the duration of their lifespans, are without a replacement to the annuity. They have waited over a decade since the announcement of Pension Freedoms and they will have to wait a little longer, Their need is not being advertised by nude pensioners on Brighton Beach or by pension riots (as has happened on the continent). But the murmur of discontent at the lack of “pension” from the workplace pension, is low but distinct. 80% of those surveyed by Scottish Widows this summer said they expected a consistent lifetime income.
Each year around 700,000 of us reach retirement and I suspect at least half a million of us do so on our own. We have little help and find the library of documents we have to complete to draw money out of our pots a barrier to spending. Instead of being a great relief, the process of turning a pot to a pension is fraught with difficulty. This is why we need innovation and why I want to restore DB pensions to their rightful place -as providers of the second tier of retirement income in the UK.
We need change to meet a changed need, the need to convert pots to pensions. We cannot force change but we must encourage and it needs regulators and innovators to work together , not at loggerheads. As we approach the final leg of the journey to launch Pension SuperHaven to the public, I feel confident that the conditions for change to happen , are in place.
“TPR’s approach to regulating scheme funding has been driven by its objective to protect the Pension Protection Fund (PPF). It has prioritised protecting benefits that have been built up, encouraging a de-risking approach which has increased the cost of DB schemes for employers. Given the improved funding position of schemes, and the fact that the PPF now has £12 billion in reserves, this objective is no longer needed. Open and continuing schemes now need confidence that the additional flexibilities that have been promised will be reflected in the actual approach regulators take in future. To signal the change in approach needed for this, TPR’s objective to protect the PPF should be replaced with a new objective to protect future, as well as past, service benefits.”
These are not my words – but those of the House of Commons DWP Committee in their Third Report of the 2023/24 https://committees.parliament.uk/publications/44035/documents/218268/default/ under the Chair of Sir Stephen Timms now Minister of State in the DWP.
In the Committee’s oral hearings it did appear that both TPR and DWP appeared to be content with this fundamental change of direction. It will however require primary legislation to amend s5 of The Pensions Act 2004.
Is the change in mindset required to effect these changes being reflected in your discussions?
Well said.
Easy to confuse the Regulator with the TERMINATOR!
It’s like a dystopian AI solution; to manage the impact of humans on the Earth, the AI eliminates all humans. To limit schemes’ potential impact on the PPF, the Regulator eliminated all DB pension schemes. Job done! PPF prospers, TPR continues to grow on its ‘success’.
But the consequences are ensuing massive future pension inadequacy, and it stripped an entire economy of growth capital. Its had the same net effect as if in 2004 the UK Govt required all DB schemes to disinvest 1% p.a. in perpetuity!
As a thought exercise, think of the havoc such a policy would have if implemented in another economy, eg the US….? Yes, quite a sobering thought ? And think, consequently would such an economy be more or less able to provide an age related wage for its citizens?
But that is precisely the effect of UK pension regulation these last two decades.
Now consider the converse – if uk pension policy was changed to require that (as the price for access / protection to favoured tax regimes and law) all DB schemes had to increase asset allocation to equities by 1% p.a., would that support or hinder gdp and growth. And add to that, amending s5 of the Act to require regulators to actually encourage delivery of increase in pensions, what impact could that have on pension outcomes?
It’s really not that difficult, is it?