CDC – pensions with targets not promises – delivered with the best endeavours of those who care – those in and managing the schemes!

The headline run by the FT out of the maligned OBR’s report on pension is that only £2.2bn of the £160bn surplus capital in UK DB pensions is going to be drawn down by companies from the occupational pensions they sponsor for their staff.

That ‘s about 1,4% of the amount that if surpluses were fixed and trusted and not pledged to insurers to close down pensions, would be expected to be back in the British economy. Put another way, the Treasury is missing out on a quarter of £157.8bn or around £39.5bn over the next five years that the OBR measure the Exchequers books.

Mary McDougall – Nov 26th.

Why surpluses are ephemeral.

In February, I published a paper by Iain Clacher and Con Keating that suggested that our surpluses were then (and are now) ephemeral, certainly to employers.

The FT picked up on this

We all warned the Treasury that it will take a different attitude from Trustees and the sponsors of DB pension plans to run on pensions on the optimistic view that surpluses are here to stay. Better pay the surplus to an insurance company and rid yourself of the pension problem, complying with the requirement to pay a defined contribution into a savings plan with no pension at the end.

Surpluses are ephemeral to trustees and employers because the Pensions Regulator insists the employer covenant is prioritised , that the PPF and its £15bn surplus are protected and that the Exchequer don’t get  £39.5bn of tax revenue  nor the economy an injection of nearly £120bn of working capital to get us growing.

Grounds for optimism?

Just why the Budget is being dragged into this argument is a little hard to explain. I had a go yesterday and attracted some very angry people who feel they have been short changed by DB pensions (pensioners of Hewlett Packard and BP who I have supported the last few years).

But I should point out that the Government is not , by promising that PPF and FAS will pay backdated increases in pensions for those who’ve lost out for the best part of 30 years, promising that the surpluses will go to the pensioners of DB plans in surplus.

It is saying that it will make it easier for employers and trustees to choose to do this, if that is who they want to favour – if they choose to take the surplus at all – is that clear? The grounds for “justice” for people who don’t think they’re getting the pensions they were promised is no stronger – yet.

You can read my post as it hit Linked in yesterday. I’ve been following a former Pension Minister who like me thought the increases would be restored from decades ago. He corrected himself and so will I, thanks to a correspondent who knows. The pension increases are not backdated for those in PPF/FAS.

My hint at the bottom of my blog is that CDC  benefit from “tapping”.

Sooner or later, employers are going to work out that they set up DB plans in the last century to benefit employers, keep them working for them , improve productivity by making people happy. This is not what workplace DC savings plans are doing – people are getting to the end of their working lives with a pot but not a workplace pension.

CDC is a way both for savers (UMES) and spenders (Retirement CDC) to have pensions provided to them through defined contributions but with the best endeavours of proprietors, trustees and advisers converting contributions and pots into pensions that (over a lifetime) mean an estimated 60% better pension.

These collective pension schemes (CDC) do not require 60% more to be paid into them to get 60% more  of them. Infact the Government and private sector actuaries agree that for the same contributions paid into  CDC and DC savings and converted by annuity, CDC will pay a 60% bigger income in retirement.

My hint was in the blog now on linked in , that employers may fall back in love with a pension that they don’t have to guarantee, that doesn’t have surpluses and deficits and that is an efficient way of transferring wealth from pay now to pay in later life.

CDC will cost money to set up and it will need to be properly explained to people who are “addicted to the pot” as Richard Smith puts it! People will start getting less addicted when the pension dashboard arrives and quotes pots as pensions (the pots that pay 60% less than CDC pensions). People will start wanting pensions that pay 60% over time and can even convert pots to pensions more efficiently than pensions and more certainly than drawdown.

All this will involve employers and the employers that have pension money are the 75% of employers whose DB pensions are in surplus. I hope that people will start making the link between over-funded DB pensions and under-funded workplace pension and look at the CDC pension as a way to go forward that doesn’t make employers “guarantors” but does make them proper contributors to their staff’s proper future pensions.

We should not have the under pensioning as has happened in some DB pensions, we will with CDC have  a pension that “increases with everything that the scheme can afford”. (I use Nest’s Paul Todd’s phrase”).