Meanwhile , the current staff get a workplace pension that often is not the company pension but an insured GPP or master trust. The older staff get the much-loved company pension and the younger go into a workplace pension that no-one can get too excited about. I call this a shame, it would be great if the two groups of staff- the old and young, had equal pension opportunities, that we had some “levelling up”.
Two good bits of news; DB surpluses and CDC
Levelling up means offering a DC pension , a pension that is paid into as a defined contribution plan but pays out as a pension based on the contributions, investment and over the length of time people live to draw the retirement wage. This is of course CDC. Last week, the DWP made the first of two big steps forward, they made it clear that employers can move money in bulk from DC schemes to CDC pension schemes.
This week comes a second bold paper from the DWP, this time about DB pensions, many of the larger of which have surpluses running on a low dependency basis into hundreds of millions of pounds. The paper in the form of a consultation can be accessed here.
I see “unlocking value for employers” as including funding DC pensions properly. Until we can see a proper way for DC pots to become DC pensions , I think that the levelling up will be from DC to CDC – because CDC is designed to pay pensions which is what the DB schemes do and what CDC can be the natural successor.
The surpluses of DB schemes could and “IMO” should work out between trustees, sponsor and advisers how money can be released from a DB into a CDC plan by way of increasing the contributions for the young.
It’s got a simple logic. To get youngsters where previous generations were with company pensions, there will need to be a redistribution of money . There are of course members of DB plans who need to be paid the increases that they never got but for the main part. But I see what the DWP call “value for scheme members” to be DC pensions from CDC where a surplus can be run down through contributions to CDC.
That way the young will get (C) DC pensions , while the old will get the value of their DB pensions.
There is a second paper published by Government yesterday from the Pensions Regulator, you can read it here.
This talks of how TPR will treat the run off of surplus to employer and to members. It is right to point out that many of the DB pension schemes have surpluses that may be (to use Con Keating’s word) “ephemeral“. Run a DB pension scheme off too hard and too early and without a committed sponsor (or contingent assets), the DB scheme could look vulnerable to markets.
I will be talking with TPR today and hope to raise this matter. Because it seems to be a solution that has advantages to DB members, CDC members and to employers and – so long as money is dripped into youngster’s plans, needs not put the schemes TPR is bound to protect, in very much danger. Indeed it might allow some DB schemes to continue to plan for a long run-off with all the advantages to investment that brings.
The DWP and TPR papers , coupled with last week’s paper on bulk transfers to CDC, makes me feel that pensions may once again be something that the executive and shareholders of large private companies can feel proud of. Where they take a lead, then many other companies who may not have the buffer of a DB surplus and the capacity to take the lead on CDC, will follow.
It will of course require leadership and I would like to think I will be meeting thought leaders this afternoon , to discuss the use of surpluses and the development of CDC.
The aim is simple, to level DC pensions to the pensions being drawn by DB pensioners.