I have published an article by John Lappin that talks of the GPP as a workplace pension. It is of course not an employer controlled pension, as “Pensions Oldie” explains here, it offers the employer no way of improving saver’s experience, other than buy paying more in contributions.
Here he argues that a defined benefit scheme is something that employers can control via trustees for the good of staff. The question that many employers could be asking is whether they would have control over CDC plans. Can they have skin in that game?
The following “comment” was made by Pension Oldie as a rebuff to my article – “Corporate Advice for GPPs and the employers and savers who use them”.
My question is whether certain companies want to take back the ownership and management of pensions , making them part of their good business.
Oldie’s problem with GPPs is they are not competitive.
Do businesses really differentiate between one DC savings scheme and another?
Do GPPs offer employer’s or staff “skin in the game”?
The provider of the employee’s pension pot is chosen by the employer who has no further “skin in the game” – unlike a DB pension scheme. Even while the employer is continuing to pay into a legacy GPP product, the employer has no interest in the performance of the product, least of all after the employee has left service.
The employee has no influence on the choice of provider and is not able to switch provider whilst in service. It is a sham to say the member can deal with this by investment choice decisions under the terms of the contract; as nearly all individuals are extremely ill- equipped to make decisions that even full time investment specialists disagree on.
Individuals therefore fall back on the default offered by the provider, who is under no competitive pressure leading to the widely varying long term results disclosed by the Corporate Adviser 2024 GPP default survey (5 year cumulative returns 30 years to retirement varying from 15.8% to 67.1% [GPPs])..
The lack of employer involvement and interest was highlighted by the DWP Employer Survey 2024 whose summary noted:
“The majority of employers had not switched or thought about switching pension provider (82%). Compared to 2022, employers were more likely to say that they had not switched provider and wouldn’t know how to switch (44% said this in 2024 compared to 38% in 2022). Almost half of employers who had not switched provider indicated they would not consider switching (46%).”
The key question is “do DC Master trusts address these issues?” . There is exactly the same lack of continuing involvement by the employer selecting a Master trust provider.
Although there are trustees managing investments they do not consistently achieve better long term returns than GPPs (indeed in some cases the same default fund is used) with the Master trust default range in the Corporate Adviser Survey 5 year performance ranging from 23% to 75.5%.
Self management?
With regard to self selection of investments by the Member, the intervention of Trustees appointed by the provider does not widen the choice or help the member select for her or his aspirations, circumstances, or needs.
At least in the draft CDC regulations there is a clear separation of power of Trustees from the provider, we will have to see how that works out as the pressure may be on the existing GPP and Master trust providers to provide a CDC offering.
When the member leaves the confines of the employer selected provider, the interest of both the GPP and Master trust provider is to retain the funds. Once again the individual is left with making a decision without meaningful support, even if he does recognise he is making what may be a life changing investment decision, and will tend to leave the funds with the original provider or possibly in some cases move to the product chosen by a new employer. In Henry’s blog I do not need to emphasise the issues at time of retirement.
To me it appears that defined benefit pension provision addresses all these issues. The employer remains involved even after the employee has left service and has statutory consultation rights over trustee investment decisions. After all in an open DB pension scheme, the trustees are managing a pool of the employer’s assets ring fenced to pay defined pension benefits to its past, present and future employees.
The employer is therefore looking over the trustees shoulders to ensure that the pension fund achieves the best “value for money” in respect of the assets held and contributions paid in. As a result it appears that DB pensions require something like 50% lower contributions to provide an equivalent pension benefit to DC. Members have the security of a defined pension benefit and are not faced with having to make any investment decisions.
It is extremely regrettable and at great cost to the UK Economy that for the past 30 years or so, the opportunities offered by DB pension provision have been completely ignored by legislation and regulations entirely focused on risk, whether those risk were real or imaginary or unrealistically assessed.
Concerns of employers are for the risk pensions.
The considerations are for;
• The Companies that have failed due to excessive short term deficit recovery contributions and risk based PPF levy contributions.
• The losses sustained by companies whose pension schemes only considered buy-out through an LDI strategic adopted at a time of negative real gilt yield.
• The loss of pensioner income by the loss of inflation protection of pre 1997 pensions and the consequential increase in the cost of means tested benefits in later life.
• The loss of profit from UK investment funds to overseas insurers and their owners through the bulk purchase of annuities, when over-priced.
• The excess bureaucracy forced on employers, trustees, service providers to guard against risks that are likely to only affect a few and could be managed in the isolated occupancies at much lower cost.
• The losses to the economy arising from investment policies focused on short term risks rather than productive investments jointly considered by trustees and employers.
• The tax loss from unnecessary contributions being paid to both compensate for the inefficiencies of the present system and also the desire by those who can afford to avoid tax by increasing contributions.
CDC and DB are viable alternatives to DC “pensions”.
CDC may provide a viable alternative to DC. As a nation we must consider the opportunities it offers and not be blinded by perceived risks, possible inequalities, or seek to over-regulate.
However, to my mind at least, employer sponsored Defined Benefit pension provision remains the most efficient method of pension provision at most benefit to the Country. I hope the Pensions Commission will at least consider these matters as vested interests still seek to dominate Government thinking.#
A response from the Plowman
These are the views of Pension Oldie and not of mine. My belief is that the way forward for CDC is for large and committed pension departments within employers to employ their skills in the management of Collective DC plans participating in the management of the scheme they are in and promoting it to other companies. This can happen if the Proprietor of the scheme has equity in the company that runs the CDC. Clearly there needs to be differentiation between the Proprietor and the Trustees and I see influence of the employer coming through participation in the management not the fiduciary.
But this is a different discussion to that between employers and master trusts. While I see employers have some control over master trusts (Tesco and L&G MT being an example), we have not to a joint venture let alone a Pensions mutual company.
My hope is that we start seeing companies with strong residual pension departments, putting them to better use, helping the new CDC plans be managed to the standard they want for the benefit of their workforces and the the benefit of the organisation acting fully or partially as Proprietor.
