Two amendments are going through the House of Lords, framed by Baroness Altmann of Tottenham. I am proud to have played a part in this work but recognise the bulk of the momentum has been created by Stagecoach’s DB Pension, Aberdeen Plc and the C-Suite of William McGrath. Here are the amendments
The likelihood is that these amendments will be debated on Monday but that is not to diminish their importance.
We are in an age where value for money counts in pensions. But there has been no VFM assessment of the buy-outs and buy-ins that have followed the uptick in the funding position of DB plans since the 2022 budget fiasco. As William McGrath presented to those of us interested in TAS 300, it is the VFM assessment of any deal done as the Defined Benefit End Game.
Until the Stagecoach/Aberdeen deal, the credible alternatives to an insured buy in and then out were confined to kicking that decision down the road. It has not been till the path the Stagecoach trustees and the Aberdeen management went down, that we understood what “putting policy into practice” meant. Now, no decision will be quite the same
I am very proud that those within William’s C-Suite have got this far and created a credible alternative. We sat yesterday in a posh room and spent two and a half hours thinking about what best to do with the past (Defined Benefit). We got s better understanding of run-on and other alternatives
We talked to of the future for pensions and discussed growth in a CDC world. CDC is projected to improved member outcomes by at least 50% versus DC. It does so by investing in more growth for longer.
DC is very expensive , the cost of certainty in DB is 35-40% higher than CDC. We left the meeting ponder which is better for a saver. Do you want £10,000 pa (certain) in DB when it could be with £13,000 pa in CDC (invested in growth). There are some big conversations to go on beyond the room we were in , involving key players in private and public pensions. The next of those big discussions is now expected to go on in the House of Lords on Monday night when TAS 300 will (we hope) be discussed.
“ Is it £10,000 pa in DB or £13,000 pa in CDC”
Surely different for every member and only determined when
each individual ( and their successor) dies.
Are IHT and inflationary outcomes to be considered in the calculation?
This debate has no end just a multitude of conformational biases. As with any car journey if no destination is defined then any route will get you there
At first I wished to challenge the assertion that DB was 35% more expensive than CDC, but then I realised the comparison was with DB buy-in followed by buy-out, I am not quite sure of the CDC format being compared but I assume from the context that you were considering retirement only CDC. On a whole life basis DB and CDC should require equivalent contributions to secure an equivalent pension outcome.
You refer to a cost of certainty, but most of that additional cost assumes a dysfunctional investment policy by the DB pension scheme, effectively costing benefits in a run-on on a buy-in / buy-out basis!
The significant assumptions at issue are that:
1. The investment policy assumes that the DB low dependency investment approach will target all benefit payments no matter how far they are into the future, whereas the CDC assumption is that the “growth” investment return will apply throughout.
2. CDC, and particularly retirement only CDC, are assumed to benefit greatly from risk sharing, whereas the DB valuation model is based on pricing each member separately even though in practice the realisation of provisions no longer required is a major contributor to actual scheme funding levels, particularly in closed mature and super-mature schemes. These risks are asymmetrical with early mortality releasing a much greater provision than late mortality, and irresponsibly priced with a low discount rate.
3. Administration costs are effectively borne by the employer in a DB scheme, either directly or through the balance of cost, and are paid up front in a buy-out transaction and assumed to be in the low dependency funding model, whereas in CDC they reduce investment returns both actual and projected.
On a whole life and actual cost bases, there should be little difference between DB and CDC with DB perhaps having the slight edge due to pre-retirement scheme experience releasing funds into the pool (e.g. through transfers out being paid on a “best estimate” basis rather than as an allocation of the fund).
As always with both DB and CDC we need to be very careful to distinguish good governance from a worst case risk analysis. The losses sustained by DB pension schemes targeting a liability measure that had little relationship to either reality or indeed any reasonably foreseeable outcome has cost UK employers, economic growth, the tax payer, and ultimately everyone in the country £Trillions. We must not let the same aversion to risk be incorporated into the regulation of CDC!
My friend and now colleague Chris Bunford sees “prudence” has become a concept that stands in the way of growth. If you have an end game, I can understand the need for prudence of the type that has been insisted on in private DB pensions (UKAS being an exception). But CDC is not an endgame nor should be DC, unless we insist on a “lifestyle” to annuity.