The headline is from a Professional Pension article by Philip Smith.  It’s about TPT’s CDC initiative. I am for TPT doing what they are doing. I hope that CDC provides pensions for those who have no wish to DIY or cash out and aren’t convinced by annuity deals.

But there’s something we call “CDC +” which is a CDC scheme with a guarantee. I won’t bore you with acronyms  (TPT’s CDC or our PSH). I will focus on an area of pensions that is being ignored by the press, by consultants and is not being pushed forward although it should – it’s an opportunity to get a pension from a pot from the most surprising of places.

The public sector has the capacity to help people with DC pots to improve their  public sector pensions. So far I have discovered you can d0 this in the first year of joining the LGPS and anytime you’re n the NHS Penson scheme.

All you need to do is send their pension department the details of your DC pot and they will promise you a pension based on the amount n the pot and your age at the time.

Whether ts a good deal or not, people are taking this offer up because they consider these public pensions are genuinely “not for profit”. Trust is an important feature of value for money f you don’t have a good idea what “value” looks like!

Fair value

The cost of pension accrual does of course depend on how much attention you pay to individual risk. Retail annuities take into account as much information about yourself as you want to give the insurer.  They are interested in how many cigarettes and units of alcohol you get through a day. These decide your income along with things like age, postcode and your affluence. They are top of the underwriting scale

At the bottom end of the underwriting scale are organisations who take on as much risk as the NHS and LGPS. They will give you the same pension whoever you are! Here there are just age and perhaps sex in the equation.

Personal annuity insurers are very careful to give you a rate that they can offset by buying appropriate financial instruments at the gong price. If the cost of bonds and gilts change, so will the annuity rate.

This does not appear to be the case with the likes of LGPS and NHS.  I am told that the exchange rate for pots to pensions s looked at every three years (about as often as all their other actuarially estimated exchange rates). Pull me up if  am wrong, but  there s very little information about for me to make confident assertions, Here s my entirety so far!

I know this is technical but the point is clear, LGPS are only reviewing rates every three years and right now, we’re coming up for another review. The rates we get today are based on 2022 before interest rates and gilt yields went sky high thanks to the Government’s plans for spending.

Here is the problem with the non-underwritten pensions that only look at rates every so often, you can find yourself a getting a pension that is a lot smaller than the annuity you can get. This is not  because of wicked behaviour by rate-setters (AKA actuaries). It is because they never thought of being market competitive. They never thought of consumer duty, value for money or a competitive market. Practices like changing rates every three years are just a little bit archaic.

There might be something archaic in a fun way if people could work out when they were in luck – filling their boots and when shafted by a stinking rate. But unfortunately we don’t have the information to know what is the good and bad rate, especially when the pension is likely to be paid in a few years time.

So fair value is very hard to determine.

But this way of purchasing a pension with a DB pot has merit

Approval rate for public pensions , from state pensions to LGPS and NHS are rightly sky high. I spend a lot of time in hospital and ask every nurse , consultant and porter what they think of their pension. They love them and when I tell them they can buy more pension with any pots they’ve built up elsewhere they want to know how.

A friend I have who works for MaPS has some experience with LGPS pensions. There is a high degree of trust for this pension scheme (even if there way of working out pensions is stuck in the last century!).

It makes sense for these big schemes to absorb huge amounts of DC money at fair value. It is good for cashflow of the schemes and good for the incomes of members. But they have to offer fair value, they should be able to offer at least the annuity rate and – as not for profit organisations, a lot better. These good pensions should offer value all round and be an employee benefit for sponsoring employers.

I don’t think that big schemes like LGPS and NHS have to underwrite, but I think they need to keep competitive with the market by adjusting rates at least every quarter and preferably every month. This should make them competitive and a vital part of the “decumulation” service that develops once we have a Pension Schemes Act 2025.

There is nothing stopping these huge schemes promoting a transfer in service – even if it is done in partnership with the private sector.