Some things are very hard to figure out!
It is a very interesting read, especially if you have an actuarial train of thought and try to work out how people can get fair shares of the money that isn’t their’s and isn’t really anybody else’s. the money of the dead.
Of course there are exiled inheritances, unclaimed because unknown, but what about the money under the guardianship of a fiduciary, how does he or she make sure that the money gets spent by the most deserving people? This is a pension problem which has been resolved in the past by the assumption that people will want to go on wanting lifetime incomes and that in a collective fund, your money is his or her money when you die.
Which I suppose prompted this rather curt question from Pension Oldie
Is not a closed DB scheme a form of Tontine, where the surplus on wind-up returns to the Employer?
Of course it ceases to be a Tontine if it is open to new members!
It is of course a threat to any collective scheme whether guaranteed (DB) or not (CDC) and this point has been made many times on this blog.
When the Scheme goes “closed” it goes red until the last payment is made and then Oldie’s problem becomes apparent. DB or CDC which do not distribute all their surplus to members – return it to the employers – who is there?
In that case a CDC turns into a tontine which is what the DWP are so worried about, because tontines are infact illegal in the UK. It might also be a good reason to buy a bulk purchased annuity before you get to the point of having to distribute all the surplus “illegally” to an employer with his hands open waiting for the gift.
It is of course a ridiculous concern at a philosophical level and my missus and I had a conversation about this over supper yesterday. Assuming there are multiple employers and assuming the numbers of people who can join a multi-employer CDC or DB scheme is infinite, there should not – philosophically – be a finite need to close a CDC plan, though the payments might need to be reduced if costs overran or investments went wrong. With DB I think there is a different problem – one of the covenant from the employer but that is collectively insured by the PPF.
What has actually happened, and here I am sure the Pension Oldie is making his point , is there is no need to worry about tontines so long as we believe that pensions are worth paying. The Dead Money in the pension scheme is a legacy to another generation of pensioners who have parented a further generation behind them and this is a Sunday morning thought – but it is charity at the most basic basis,
Charity “the voluntary giving of help, typically in the form of money, to those in need“.
We do it all the time when we die, I say “we”, I mean species of the race! For we put money aside for ourselves as well as others but accept that when we die, others will benefit. The talk of the state pension being paid on a “fair” basis by being made available as a capital sum to those who fancy they won’t live is nonsense.
It is also the reason that the flex and fix world of Nest and the other master trusts who are giving individuals transfer values to their pensions in payment is fundamentally “uncharitable“. It is asking people to take their money against the rules of a collective arrangement and I cannot imagine how a CDC could operate with the freedom to get your capital back when you need it.
It is important we understand this important connection between people saving for their future and their acceptance that they may die charitably, making money available to others.
I think this is what the Pension Oldie is hinting at “charity”. Tontine is not a charity, it was a means of financing things that paid an income with the capital returning to the surviving party, most often the founding partner being the financier of the project. It was popular as survivors could include an ever diminishing number of those getting paid a pension-like annuity but neither the DWP or anyone else has worked out how a CDC scheme that closes – doesn’t become a tontine with beneficiaries most unclear.
Herein come the complications because if we talk of employers as beneficiaries, how does that work out when there is no future planned from the CDC or indeed a DB plan. These questions are why tontines have not been made legal and why it’s taking multi-employer CDC so long to see legislation from the DWP.
If we accept the principal that our benefit system, including the state pension is an act of national charity, then collective saving and the collective payment of DC and DB pensions is simply an extension.
Isn’t there something bigger?
You’ve prompted an interesting philosophical discussion here.
With a DB scheme it is not unreasonable to consider the employer as a participant and therefore can benefit when it becomes the “last man standing”. However when the DB fund is distributed the State gets a slice in the form of the tax on the distribution to the employer (presumably to reflect the tax relief given on the contributions paid in and untaxed investment income). Does the State have a similar interest in a CDC fund?
An employer can avoid the distribution tax charge by re-opening the Scheme to its current employees – either to provide DC benefits or much more efficiently to fund current and future DB benefits. The fund then ceases to become a Tontine with the introduction of the new participants.
Would not the same apply to a CDC scheme? If the State became the last man standing, would the CDC scheme not wish to use its asset base to attract new participants who should receive more generous benefits than their contributions paid in would otherwise have provided?
Pension funds are not subject to the Rule against Perpetuities.