Terry Pullinger and I are friends, frustrated by the failure of Government after Government to see policies over the line, content to make asset managers and insurers rich while millions of savers are left with pots and no pensions.
Andy Haldane’s article which you should be able to read here, says the same thing in economist’s language.
People hope that their pensions are managed, expect their money is managed sensibly (like new cars they should not pollute). People expect their money should make British industry (from data centres to steelworks) flourish.
But that is not why they let there be another tax on their payslip called “workplace pension”. The point of letting money get spent tomorrow is they want a “wage in retirement” – to quote Terry again.
It has taken the DWP years to get another version of the secondary documentation allowing CDCs to go ahead and no doubt the next version (for companies not called Royal Mail) will be risk averse , like the “failing fiscal framework of the Exchequer.
Hope in the gloom Pullinger describes
I was speaking yesterday with a young man who has set up a company “Collegia”, it does one thing – manage the auto-enrolment of small companies who operate payroll through the auto-enrolment process to a very simple GPP. It has attracted 8,000 employers with 45,000 employers paying basic mandated contributions (a few companies more but not many).
Eduardo and Riccardo of Collegia (with College)
This company is profitable because it was set up from the start to be driven by the latest technology and to focus entirely on helping savers understand the pensions they could expect (using what the FCA have laid down). People are happy, no complaints and reasonable charges which do not bother to compete in the master trust price war.
We discussed what he would do faced with the “scale” requirements of the Pension Scheme Bill (he isn’t managing £10bn or anywhere near- nor does he a plan to get to £25bn by 2035). We agreed that what his clients wanted was a pension for staff and themselves (the clients are small businesses using HMRC payroll software).
I have been here before in 2017-18 when the first challenge of staging auto-enrolment was upon the clients of HMRC payroll, they are the SMEs of Britain who have no seat on any pension boards and now find a sensible answer in Collegia. If Collegia had been part of the solution back then, they’d be bigger but heh – Eduardo and Riccardo were at college then, learning how to deploy technology to solve problems like this.
We discussed the options and Eduardo and his friend do not want to sell up to an insurer in what is nicely called “consolidation” but less nicely called “failure”. Failure is not in the vocabulary of these people. Instead we discussed ways of paying these people pensions using technology and collective pensions (CDC if you like). They could be dong this now if all the 45,000 staff and their employers were happy that Collegia became a CDC scheme, stayed trading and attracted to it employers who wanted to work with the simple solution Collegia have in mind – paying a “wage in retirement”.
We will know if this kind of sensible way forward will be allowed by the DWP in a few weeks, I have been invited to a meeting with the Pension Minister later in the month to hear him tell a group of enthusiasts, including employers , what the rules for CDC will look like. The idea is that employers will be signing up to that kind of solution and that kind of solution will be able to grow from acorns to oaks and not fall under the scale rules. I will represent the spirit of Collegia which is the spirit of Pullinger and of the Pension Plowman.
You could say that we want to break the failing fiscal framework which has held back pensions and promoted pots, that has broken Defined Benefit Pensions and stopped CDC pensions from developing. I went to a policy conference last week about the Pension schemes bill where CDC wasn’t mentioned, it was run by a brilliant firm who forgot to include it! Decumulation for them was drawdown and annuities, like that was what Defined Contributions led to.
I am not prepared to see CDC confined to discussions between lawyers and actuaries in City Conferences. I want CDC to work for everyone and be known as “wage in retirement pension schemes”
Torsten Bell
A press release!
Terry Pullinger
Fundamentally the issue is that legislation is designed to provide an occupational pension system that nobody, except those that have a vested interested in complexity and administration, wants, Employees wish the reassurance of a known income in later life, while employers wish to reduce both the current and future costs of meeting their employees’ aspirations.
Although infinitively more efficient than DC (especially accumulation and decumulation DC), CDC is a poor substitute for DB and it is vital that it does not fall into the same traps, particularly that of only considering failure. The key cornerstone will be the valuation measures adopted to assess the pooled fund against the future cash flow commitment represented in the target benefits. In the early days of a pooled CDC fund it is likely to appear to outperform an established pension fund because it will be cash flow positive. In probably 20 plus years time the CDC fund will have matured, where its key financial objective will be to ensure that the cash inflow from new contributions and dividends and interest received exceeds the benefits paid out and the administration costs met. In both phases the market or realisable value of the assets and especially the discount rate applied to the targeted future benefit payments are entirely irrelevant to the key success factors, these being the attractiveness of the Scheme for new contributions and the actual cash inflow generated by the existing investments.
It is only in the terminal phase of a CDC scheme when the cash inflow from new contributions has dried up that the realisable value of the assets becomes an issue. By then the current pensions in payment, probably of fairly mature pensioners, will be the key cash flow determinant. To deal with a deficit then being projected, the obvious solution would be to merge the CDC scheme into an another cash flow positive CDC or DB pension scheme that can generate increased future returns from the combined asset pool than could be achieved by the failing CDC fund repeatedly disinvesting. With surplus assets, the remaining mature pensioners are in for substantial unexpected windfall gains which probably could be used more efficiently for society across a wider pool. Even in the terminal phase, the discount rate applied to the liabilities is irrelevant.
Why O Why – do we not just come clean and accept that a fully open DB pension scheme is the most efficient way of meeting employees’ retirement income aspirations at lowest cost to the sponsoring employer!
Pension Oldie, you know the diagram I publish for both DB and CDC pension plans (I will publish it separately below your excellent contribution. In my view you are wrong in assuming that either a CDC or DB plan needs to close. Your assumption is that the covenant closes – the employer says no more. This is less likely for both DB and CDC if there are many employers and less likely in CDC where the defined contribution is flexible. I don’t think it is easy for an employer to negotiate its contribution down but I think it can be done, especially if schemes work on a money purchase basis (non guaranteed pension purchased for every contribution rather than a DB accrual replica.
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