Wow!!!!
This is the comment of Pension Oldie , known as an accountant , CFO and vintage Pension Trustee. He continues after admitting to have been blown away by Christos Christou’s work of genius
Wow! I will need to re-read again many times to fully understand the analysis, but it does appear to be an overwhelming case for a whole life collective pension scheme, with retirement CDC as a “stop-gap” product for those who have lost out from being in an individual DC arrangement.
My first thought is that it shows the national folly of abandoning DB as the de facto default pension arrangement. In DB, the employer defines the deferred remuneration, leading to greater certainty for the member and removes the need, like CDC, for active decision making by the member and possibly itself a significant contributor to stress related illnesses. DB also benefits from mortality credit and minimises losses due to excessive administration and advice costs by placing the responsibility on the scheme sponsor. Further with DB the pension benefits do not go down, are inflation protected, and are guaranteed by the sponsor and insured through the PPF.
The second thought is that the benefit of whole life CDC is based on the assumption that the member will remain in the CDC Scheme throughout his working life. Much of the benefit is lost if the Member leaves a CDC scheme to join an employer who only offers contributions to an individual DC. A subsequent transfer from the DC pot into CDC benefits is subject the same transition risks as from accumulation to decumulation DC. This would appear to be a strong argument in favour of following the Australian example in allowing the employee to chose the pension scheme to receive the employer’s contributions.
The third thought is that given the Increased efficiency of CDC (and DB) over DC in converting contributions into pension, should this not be reflected in auto-enrolment minimum contributions with proportionately higher contributions being required into a DC arrangements. The present auto-enrolment Regulations for DB schemes replace the 8% contribution requirement with a benefit test of a 1/120th average salary accrual rate with inflation protection and spouse’s pension rights. Could not a similar target benefit test be applied to whole life CDC schemes and required contributions set accordingly?
My final immediate thoughts are: What will the drying up of annuity purchase cash flows do to the risk profiles of the insurers; and could the UK economy withstand a minimum of a £3.2BN annual decimation of the pension advice and asset management industry?
Off topic (perhaps) The blog commenter Al Cam told me to look at your website when I said I was alarmed by the piece linked below and asked him whether the like was going on in Britain. I must say it’s putting me off the idea of buying an annuity.
https://tscsw.substack.com/p/eat-the-pension
I don’t have the mental capacity to analyse either BPAs or CDCs – I rely on better minds! But I’m quite sure that shipping our pensions out to Bermuda is difficult for those in DB pensions. I’ve read what you sent me and got to the consumer bit.
“Everything to this point has been about institutions. Here is where it touches a person.
In May 2023, AT&T transferred its pension obligations for roughly 96,000 retirees and beneficiaries to Athene, in a single transaction worth about $8 billion. This is called a pension risk transfer, and it has become one of the busiest corners of the insurance industry. A corporation with a defined-benefit pension plan hands the obligations, and the matching assets, to a life insurer. The insurer issues annuities. The retirees, who used to be beneficiaries of a corporate pension, become annuitants of an insurance company.
The retirees did not vote on this. They were not asked. One day their pension was an obligation of AT&T, backstopped by the federal Pension Benefit Guaranty Corporation. The next day it was an obligation of Athene, backstopped by something else entirely. AT&T, for the record, recognized a pre-tax pension settlement gain of $363 million on the transaction and shed its PBGC premiums. The transfer was good business for AT&T. Nobody asked the 96,000…..”
And again
“That is what “you cannot opt out” means. The people with the most at stake in this structure are the people with the least ability to see it, understand it, or leave it.”
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