This AI generated “Pensiion” Plan does not fill me with confidence! I don’t feel good about funding either!

For as long as I’ve been a pension consultant the discussions have focussed on the funding of defined benefit schemes. Over the past 40 years we’ve swung from surplus to deficit to surplus (where we are now). Each time we are given the numbers , we grind our teeth or jump for joy until we get to an age when we can retire (typically well off).

It is not the members (or the consultants) who have paid the price of DB schemes, the risk and price of necessary contributions have been paid by employers.

For some time we’ve deserted pensions and replaced that system with the provision of pots of money which people are free to spend as they choose. This has not proved satisfactory to Government or to those who worry about adequacy. They have landed on a way of paying pensions which does not require employers to meet demands from trustees (overseen by the Pensions Regulator).

That’s because CDC does not deliver a deficit bill to employers. That’s the bit that everyone has focussed on when promoting CDC. But they ignore the advantages of CDC not producing a surplus. The advantage is simple, when the fund behind CDC pension promises is more than is needed, the amount of pension promised increases. This can either be through pricing of pension purchased (in a CDC workplace pension) or in the amount of pension promised and paid (in both whole of life and retirement CDC).

You might think that I am talking of a problem that doesn’t exist. If you think that distributing surplus is easy, then read this blog. John M Clancy argues that the amount of surplus fund in the LGPS DB scheme is a political nightmare for Andy Burnham – it could be argued that all his potential constituents are owed £4,000 as a tax rebate for funding the Manchester section of the Council fund.

The Government last week published punchy consultations from DWP and TPR on what can be returned to whom and concluded that this should be left to trustees. This has not gone down well with some union friends who would want surpluses to be paid as pensions to members of the DB scheme and those in  (C) DC plans. Here’s Neil Walsh of Prospect Union commenting on a blog on the options to distribute DB pension surplus

It was very disappointing that the Government didn’t accept Bryn Davies’ amendment to make return of surplus subject to the consultation regulations rather than something that just had to be notified.

But where is the mechanism for return of surplus to benefit DC members? Are there any examples of DC members benefiting from falling deficit recovery payments or lower employer DB future service contribution rates?

The problem with surpluses is what you do with them and of course there are those fierce consumers like Jo Cumbo and Paul Lewis who see any dilution of the member’s security as to be fought.

This reform is intended to boost the economy. Pension scheme members should scrutinise any proposal to release surplus funds, even where some of the surplus is to be shared with members. https://t.co/0ykF9tK9wW

— Josephine Cumbo (@JosephineCumbo) June 11, 2026

There is of course an alternative view that surpluses were created by employer’s deficit contributions and that returning the surplus to them is just giving the company (and its shareholders) what it paid back.

This argument will be the next battle. The unions are right to say that members need more protection (along with Jo and Paul). The shareholders have smelt raw meat and want the money back asap (meat does go off).

Here is a weakness in the DB model. It requires over-funding in good times and under-funding in bad. It is only fleetingly in balance between funds and liabilities. Like a stopped clock it will be right two times a cycle but only when things are getting better or worse,

If CDC is managed properly, it will always be approximately right (or approximately wrong depending on how you see approximations). Over long periods of time, and CDC works to at least a 30 year timescale (Derek Benstead prefers “intimate”), the assumptions taken by the actuary and followed by the investment manager will sometimes be out of kilter and will require an adjustment down or up in pension increases.

In really bad times (twice in the last century according to Royal Mail’s modelling) a pension will have no increase paid for a  year and even a small cut in nominal payment.

But a CDC pension will never be in deficit in bad times or in surplus in good times. That’s because there is no buffer and no argument about its use. Here CDC in the UK is at advantage to European systems, it is very much advantaged relative to our DB system.

I’m glad a CDC can’t have a surplus or a deficit, I’m sick of arguing over them.