Jo Cumbo is spot on here;

I am sure that Jo is furious that pension mandation could leave some schemes the worse for doing what they had to do. She sees things through the eyes of employers and through those of people like her who may find their DC pot damaged by risks taken to meet the Mansion House Accord and pensions mandation.

But the problem for saver and for the employer is not just that the investment went wrong, it is that the person who takes all the risk is the saver – on his or her own.

The real damage to pensions is not that sometimes pension investments go wrong. It is that there is no-one to pay the cost but the member. That is DC pension’s fault. It need not be that way. Take USS who crazily followed into investment into Thames Water at the wrong time and lost the fund a fortune picking up the cost of pillaging by Private Equity firm McQuarrie. Here the cost has been felt in poor performance but not in decreased pensions. If that investment had been a large part of USS’ DC scheme then all the risk would have been taken by academics.

Because it does not share risk across different pensioners , some quite young , some in receipt of pensions, Defined Contribution “pension” scheme leave savers exposed to muck-ups like Thames Water. BTW Thames Water is a classic stock and bond that sits within the assets covered by the Mansion House Accord.

For every Thames Water there are British success stories like DeepMind that if they had been kept in the UK through DC pension fund investment, would be making people like Jo and me (DC investors) a lot of money.

Google DeepMind, trading as Google DeepMind or simply DeepMind, is a British-American artificial intelligence (AI) research laboratory which serves as a subsidiary of Alphabet Inc. Founded in the UK in 2010, it was acquired by Google in 2014^[8] and merged with Google AI‘s Google Brain division to become Google DeepMind in April 2023.

The company was acquired by Google in 2014 for about $600 million. However, its current value could be in the billions due to its significant contributions to various sectors, including healthcare and gaming. DeepMind’s innovations enhance Google products, indirectly boosting revenue, which adds to its overall valuation.

Neither investment looked what it turned out to be.

Google’s made a fortune out of DeepMind, while USS has lost a fortune on Thames Water. One was smart, the other wasn’t.

Employers should be terrified with the prospect of choosing a DC workplace pension that buys into an asset that gives it the reputation of a Maxwell when it had no influence in the mistake. This is Jo’s point (though she doesn’t consider the loss of opportunity from Deep Mind!).

What she is actually saying is that DC pensions are the wrong place to expose individuals because there is no fall back for them, no-one to share the risk with. They are simply at risk from the Mansion House Accord and she is right.

Sharing the risk as a DB scheme

There have been well invested and poorly invested DB pensions; USS has turned out to be badly invested but it still has done well enough to pay its pensions in full and now charges less to sponsors for the guarantees as the markets improve, the discount rates work in their favour, liabilities (sadly) aren’t increasing as expected (profs aren’t living longer as expected). Many DB schemes have surpluses, these could prove to be ephemeral and in truth they were much better funded before October 2022 but that’s another story!

We cannot rely going forward for a DB pension unless we already have one paying or to pay. We will only have one accruing if we have a strong covenant like the tax-payer – that includes LGPS. USS is not supported by tax but relies for getting paid from income that comes from Government and student loans. Private companies will not take such risk and such risk includes the chance of buying into Thames Water.

Sharing the risk as a DC scheme

But for every Thames Water there is a Deep Mind and CDC is able to take the time to make money out of the Mansion House Accord. It can hold assets over time and doesn’t have to liquidate as DC schemes must, to meet the encashment needs of people like Jo and me who hold our pots exposed. Our employers, in Jo’s case FT , in mine a consultancy now Gallagher and an insurance company called Eagle Star (now Zurich) are not on the hook for a Thames Water when auto-enrolling us into DC pots.

They should consider leaving DC and re-establishing workplace pensions under CDC where the risks of a Thames Water are spread around a wide group of pensioners and pension savers. They shouldn’t do this just to reduce the risks of the DC pension scheme (though that comes into it) , they should choose a CDC scheme as their  workplace as they will pay more in retirement than DC schemes (up to 60% more says the DWP ,  actuarial firms and the PPI). Even if 60% isn’t achieved for you, you are taking a risk that is spread, the volatility of a CDC pension is reduced and the chances of a CDC pension ever going down year to year is reckoned to be 2 years in the last 100.

I am quite sure that CDC will muck up as DB and DC plans will do, I would rather employers took all the risk but that isn’t going to happen and if they did , the cost would come out of how much I’m paid.

The best way to cope with risk is to take it and then share it. CDC does this brilliantly. We can have our Deep Minds working for us and live with the losses of Thames Water. In the long term we need to take risks to get growth and CDC gives us time to do so!

The Mansion House investment style works well  for CDC pensions but not so well for DC pots