As Webb knows. it’s on thing to create choices, it’s another getting them used
“Making sure more employers and savers have the option of an innovative CDC pension scheme is an important part of making that happen.”
It would be easy for an enthusiast like Henry Tapper to argue for a CDC future , immediately through a switch to a CDC decumulation and in the longer term by whole of life CDC schemes set up for all kinds of employers who want their contributions being invested to give better value for pension money.
Let me take a step back, Bell did not say in his LCP speech that he was mandating CDC as the way forward, he said that it was one way forward for workplace pensions and (if thy become consolidators) all the other DC refuge floating around the legacy ocean.
But as Sophie Smith reports Bell saying in Pension Age
“There is a good case, obviously, for allowing another option on the decumulation menu, through decumulation CDC… that is obviously a bit trickier on the policy side, but that work is now well underway.
What his problems on the policy side are I don’t know but I can guess and they include some powerful lobbies, most important the Association of British Insurers and the Investment Management Association who will have a quite separate agenda from consumerists such as unions and organisations such as pension playpen. I suspect that consumerist organisations aren’t getting quite the airplay but we know there are those in DWP who stand up for better pensions for people with limited resources and CDC fits that bill.
What we can say that brings DB, CDC and annuities together is that they all offer income until the death of the person paid the income. In some instances they can pay to the second person put forward, typically a surviving partner (sometimes limited to spouse).
The very real challenge for Government is to create a means to get an income for life as the default for people drawing a workplace pension (DC) pot. The Australians saw this as important a few years ago but got the politics wrong (to use Bell’s word). We need to have a Pensions Bill that means workplace pensions , whether master trust or single employer saving vehicles , are required to offer a DB , CDC or Annuity to staff, along with a good explanation of why!
You may feel the inclusion of DB a bit fanciful but I have to be clear that once schemes decide to guarantee any part of the pension income going forward, they have defined a part of the benefit (DB). I know Paul Todd explains the NEST proposal that it offers a minimum level of pension (presumably with the capacity it has through size) then it is DB even if most of the excitement will be about the non-guaranteed increases which will be paid against what can be afforded (CDC).
To make this easier to Regulators and Legislators, most of us on the private side of the public/private boundary see what Nest is doing as “shared ambition”. We’ve been focussing on one DB scheme – UKAS- that is over 200% overfunded on its DB funding, it delivers an increasing amount of the pension it offers members through discretionary income paid out each year as it can afford. This is why I want to continue to promote shared ambition as a way of paying pensions, because Nest see it as feasible way, UKAS operate it and Pension SuperHaven want to do much more.
Shared ambition is a new phrase to describe pensions that guarantee a minimum income (to be competitive or better than an annuity) but which aim to provide a better income in practice, because they can pick up market returns that allow them. Many in this space refer the approach they offer as “with profits” but I would prefer not, it is a phrase that was spoiled 20 years ago and “shared ambition” is much better.
So let me offer a simple retirement choice to arise out of the Pension Bill/Act which we will see before the summer recess (July 22nd).
- that workplace pensions must offer a default means for people to get a lifetime income using a promise to pay till the day of death. The balance between certainty and potential growth will vary depending on the default of which there will be three types
- Three types…these can include shared ambition (a type of DB) , CDC using options that will be expanded in the Autumn and annuities – which are doing well at present because of the surge in gilt markets
- that there will continue to be the option to opt-out and have DC pots paid free of pensions via drawdown or via cash-out. The difference is that this will not be a default, it will need to be stipulated.
I am sure it is a lot harder to write the Bill so it becomes an Act and the menu offered by workplace pensions is likely to be quite different one workplace scheme than another.
But so long as there are simple rules such as a default and rules about the default, we will see success, a reintegration into “pensions” for workplace savings schemes which have lost their way.
Defaults work for pensions – pension are too hard
We thought that we would have huge amount of choice outside of defaults when we set these schemes up – we are wrong – 98% of savers chose not to choose and were defaulted into the Nest default investment fund.
People want others to make decisions for them and will only disagree if they feel expert. I do not consider myself expert enough to make the hardest nastiest choice in pension.
Trustees and their executive will need to set up and balance their commercial considerations against their fiduciary responsibilities to savers.
Government could and should make life simpler by relegating pension freedoms to “alternative strategies” for those with strong views and/or advisors.
