A target pension for most of us
UK pensions policy and practice are at a crossroads. We are on the cusp of answering the central question of pension design – how to ensure that as many people as possible are able to save for a reliable income for life in retirement through pension plans which are structured, run and invested on their behalf in a cost-effective fashion.
So begins an article published by IPE , authored by IPE by David Pitt-Watson and Hari Mann with whom I have been working on CDC for more than a decade.
I agree.
The concept of a collective defined contribution pension scheme as articulated with this simplicity is precisely what I would like to see. If you can sign up to IPE you can read their article which rehearses what Friends of CDC has been saying for 15 years and what my friend Derek Benstead has been saying since submitting a CDC stakeholder pension proposition in 2000.
Indeed Derek has produced an illustration of how a CDC or DB plan embraces the y principles established by John Hamilton last month in the famous Melton Mowbray pie factory!
Frankly the issue of reopening or creating a DB plan or converting DC saving to CDC is not as big a deal as the pensions industry has made it.
The difference between a DC savings plan and a CDC pension plan is that the former gets you to the latter if the savings is for a pension. A transfer of DC saving into a DB plan that provides a guaranteed pension is what we have created with Pension SuperHaven. A transfer of a DC plan into a CDC plan is offering a higher income from the plan but without the 100% security of a DB plan with the PPF behind it.
If employers are prepared to sponsor it with Defined Contributions (what auto-enrolment encourages as a “workplace pension” then a CDC scheme could be used to provide the goal set out in the opening paragraph. There are concerns that CDC might not provide the 100% security and no it won’t. But most of us live with a degree of uncertainty about our future income and we work out whether the uncertainty is good to live with. According to David and Hari, 99.8% of postal workers offered the CDC available to them as Royal Mail workers, took up the option.
This was envisaged and now it has happened. Here is a paper I saved in 2019 when May was prime minister and Sam Lister, Deputy Editor of the Daily Express “got” CDC!
Unfortunately, the progress of CDC has been very slow. Derek Benstead reminded me the other day that he began discussions with the CWU union in 2016, Royal Mail in 2017 and that an announcement was made in 2018 that the company would embrace the degree of uncertainty offered by CDC relative to DB, because it offered 30% more to staff per pound invested. It has taken over from a DB and DC plan at Royal Mail.
We now have a new Government which is devising a new Pensions Bill which may or may not offer help to employers looking to do what Royal Mail did. Royal Mail will be the organisation that led the way, I admire it and its unions and its advisers and I am sure that its plan will deliver pensions over time that will validate CDC to others.
But as I have written on this blog over the past few years, we do not see the commercial advantage amongst pension providers to replicate what Royal Mail did. For Royal Mail, establishing CDC was a means to solve a problem, no such problem exists for master trusts at the moment, they are making money as savings plans. We saw last week a major shift in the way TPR organise itself to regulate DC and I suspect there is movement afoot to deliver action (if CEO Nausicaa Delfas is to be believed). IF TPR are intending to speed things up, so might providers and so might employers.
Let us be frank, collective arrangements do not happen because of retail behaviour, they happen because collectives pull businesses together so they can do what Royal Mail has done. Master trusts could do this, they are sitting upon over a million small businesses and can show them a way to convert DC into pensions via DB or CDC. So can unions and employer groups prepared to get providers to create whole of life DB and DC master trusts that deliver pensions and not just “pots”.
As I write, I can sense a change within Government to ensure that the 20m people (13 m of whom are in Nest) can look forward to extra pension from their saving through legislation that ensures pensions as an outcome from saving. Personally I do not think that Government should instigate this by compulsion, we have a system of default that allows opt out, look at Nest, Royal Mail , look at opt-out rates which are low. But most importantly, people who opt out of collectives do so for their reasons and they should not be required to do what most do.
The greatest achievement which we can point to over the past twenty years has been the instigation of change by offering choice and positioning an option as the one most will benefit from. David and Hari need to keep on, so do people like me and Derek and many others who are Friends of CDC.
Government must stand up to the insurance industry whose interests do not lie in CDC. That said, it was pointed out to me that CDC does need skills from the insurance industry to work. Namely, with profits Actuaries are likely to be better placed to do the necessary smoothing calculations.
I’m inclined to agree because pensions Actuaries have been turned into short term thinkers and to worry about short term volatility. But then we need long term thinkers if we’re going to genuinely have pension schemes running on, with surplus distribution. Converting the thought, “but this is how we’ve always done it”, is the crux.of too many pensions issues. Aargh.
“Actuaries have been turned into short term thinkers and to worry about short term volatility”
I wholehearted agree!
But then we need Trustees to challenge their advisors. This means a well run pension scheme needs a trustee board that is prepared to do so and not just accept established “group think”, especially actuarial group think. To do this Trustee Boards need diversity and inclusion, in terms of skills, experience and background. They have also got to be prepared to exercise their authority to deviate from advice given, or even regulatory pressures, if they believe it is in the interest of the Members.
This will be particularly acute in multi-employer CDC where it is the Members, not the Employer/Sponsor, who bears the cost of the inappropriate decision or the excessive administration cost. Will the Trustee Board (the “Governing Body” in terms of the CDC Regulations) really have the courage to sack the CDC scheme promoter providing funding, administrative or investment services, or the actuary?
What do we really mean by “professionalism” of Trustees?
There has been too much focus on the x% more headlines based on modelling which then does not do like for like comparisons. There are at least five things that need to be adressed in no particular order
1 / Market – Mastertrust vs Sponsor
2/ Design objective – the designs which make a virtue of increases into retirees dotage are flawed. This is a weakness not a strength
3/ Commerciality – There is no real compulsion, little short-term flow and therefore it is hard to justify time and capital. Not helped by fragmentation
4/ Regulatory framework – needs a new approach. CDC is either sponsor driven or a mark to model retail product. These are markedly different
5/ Unanimity – probably hardest of all. But new paradigms and products need simple consistent design, comms and engagement.
And this is before anyone overlays the 25 C’s to success
There are actions from various parties which could remove or reduce many of these challenges, but it would need a focused Defined Ambition re-run