It is necessary to get on with it. We cannot regulate by de-risking, we must accept insure against calamitous failure (both by sponsors and by trustees). We have done so with the Pension Protection Fund. The PPF is strong and should be encouraging investment as a back-stop. The Regulator should not be rewarded for nothing happening. We have no CDC schemes but Royal Mail, no substantial new DB plans have appeared in the past 20 years. Attempts to invest in DC are met by the worry that people will call on their pot from as early as 55. There is no thought that a 55 year old has at least a 30 year prospect of needing a pension.
We need to look at what defines a DC scheme. To me, the only thing that should define DC is that the employer pays a set amount, typically a percentage of pensionable pay into the scheme. That excludes schemes which are targeting paying a sum where the contribution is determined by what is needed to meet liabilities. DC schemes are required to demonstrate contributions are paid of 3% from the contributor, 4% from the saver and 1% from the Government. Right now, the Government are in default on the 1% (but that’s another story).
There is no rule that says that DC schemes should not pay pensions, no rule that says that a DC scheme should pay benefits with the same certainty as a DB plan. The concept of a with-profit pension where the promise is 100% certain is a real insurance. Even if it is paid from a 100% invested fund it is a pension so long as there is capital behind it to be considered certain.
I have been learning about this from my friends who read this blog and from those who I work with. The DC scheme can play a DB benefit. The pensions industry and those who are looking to regulate it, must focus on allowing DC to sit within the auto-enrolment rules as DC schemes , even if they pay DB benefits.
The Pensions Regulator must be comfortable that schemes can be DC for employers but DB for members. The members must have the certainty of a defined pension with a certainty equivalent to an annuity, the employers need not worry about sponsorship of this promise.
This means regulators stopping focussing on de-risking and starting to think of DC as a means to get lifetime investment back into the pension system. Instead of worrying about not being seen to make a mistake, they must work with people who want to provide both insurance and investment through pensions paid to anyone who can join such a scheme.
This may sound a little strange and undoubtedly it will be to those who were not working and saving in the 1980s and 1990s before we went into lockdown. Because of Maxwell and a few other rogues who took advantage of a system that relied on “trust” we had people stripped naked on Brighton beach. But Altmann, Young and others of the generation above me put the backstop in place so that investment could continue.
But investment hasn’t continued.
But like a computer nerd who buys too many means to protect the computer, we have created protection after protection till our system is running slow it doesn’t do the job.
Funded pensions in the private sector are now disinvested to a point it can be labelled “de-risked”
We have closed the door on the future, deprived our pension schemes of the oxygen of growth – equity and real asset investment.
As a result, we are the least productive of electricity, which drives everything, than our immediate neighbours
We must accept that for the 25 years that the Pensions Regulator has been in existence, we have blown it for the economy, for those who work and for those who will stop working and then rely on their pension, or their retirement pot.
Let us listen to Rachel Reeves, she is right. We have blown it and this is not about politics, it’s about culture and appetite. The Britain that developed in the 19th and 20th centuries. We must stop focussing on budgets and start thinking about what can be done to get us back on the trend we were following before 2005. 2005 is an important date for a lot of reasons, but especially for those who work in pensions and want them to become what they were “Britain’s economic miracle”!