Rachel Harris speaks for Schroders and explains this strange CDC thing to readers.
Firms which may have a more paternalistic or “avuncular” approach to its retirement scheme members may be more likely to take up the adoption of collective defined contribution, according to Rachel Harris, head of UK institutional at Schroders.
“Paternalistic and avuncular” are not words that fit well with City folk, they could be replaced by dozy and uninvestable. Living in the City and passing by the hallowed doors of Schroders , I would say that this perception of CDC is fairly typical of asset and fund managers.
“CDC will philosophically align quite well with what some companies are trying to do. This is namely those companies that have a more paternalistic approach, more avuncular approach, as well as potentially those companies which have smaller pots. Royal Mail would be a good example of this. However I would not expect, for example, financial services companies to go for something like CDC”.
No, of course not, the City and those who aspire to the City value set are not going to get behind anything that might also be taken up by employers whose staff have DC pots that have been rather underfunded. They typically are underfunded because staff have been lowly paid (whether now or at retirement), everyone’s lowly paid compared with City folk.
Those who are as bright as the senior executives I meet who run companies outside financial services may be quite pleased that City aspirants are not joining into collective pensions. The average lifespan of a white collar city worker is likely to be way above bus workers, shopworkers, carers, steelworkers – I could go on. Why should they want to be in a collective pension scheme dominated by high-flying , long-living City folk? They’d bring down the pensions payable to the shorter living employees they are being “paternalistic and avuncular” to.
Except of course they aren’t being anything like that. They are competing in global markets and need to take what chances they can. If you are unionised and determine reward as what’s paid now and what’s paid at retirement, then DC is not registering as good news in your negotiations. As far as members and their representatives are concerned, DC saving is not paying anything at retirement by way of a retirement wage. If it is to be viewed as an income on the pension dashboard it will be framed as a level annuity, hardly to be the kind of wage the state pension offers- or for that matter what DB pensions are still being paid to pensioners and deferred pensioners.
For such employers, CDC is not just good news for their staff but it’s good news for the Reward team who can at last consider counting the pension contribution as part of total pay but get approval from unions and from employees who get the message from local union officers.
This is of course is below the pay-grade of those in financial services who will miss out on the efficiencies of collective pensions so that staff can manage their own financial affairs. It is often assumed that financial services staff know how to tackle the nastiest , hardest problem in finance, but my experience, living with and being one, is we don’t!
So , Rachel Harris, perhaps you can keep your patronising view of those who want to introduce collective pensions to yourself. You should talk to your staff and see what they feel about CDC.
One fundamental reason that Collective Pensions are more efficient in turning contributions into later life annual income (whether 60% or more or less efficient) than DC pot creation followed by annuity purchase is the minimise of loss of resources to third party product providers, most obviously annuity providers but also asset managers (particularly in drawdown).
DB pensions are also collective pensions, and should have the same fundamental efficiencies, provided the resources built up by contributions are not lost to the profit margins of a bulk annuity provider or an asset manager and counter-parties associated with LDI matching to secure the insurer’s not the scheme’s or sponsors profit.
CDC Collective Pensions require risk capital to be provided by the Scheme “Proprietor” whereas in open DB the sponsoring employer’s guarantee removes the need for that risk capital. As not for profit companies have limited access to capital, it should not be surprising that they are prepared to let the commercial CDC proprietor take the strain, albeit at the cost to the Member’s potential return. Commercial companies providing the DB pension guarantee can internalise that profit through reduced Balance of Cost contributions. This should be particularly significant for smaller and growing companies.
City firms / FSC tend to have employer contribution rates in the 15-25% range, something well out with the reach of the other 9million or so AE DC ‘savers’,
No need to be avuncular at those rates, and of course FSC employees / executives will want control of their own very sizeable pots on retirement, in many cases to support their retirement exits to warmer climates,
That’s the truth behind this.
And of course for the working masses (whose scale pays for the whole shebang, and the second homes) CDC provides better fairer outcomes [+20-60%] for less money, so again no incentive for the AUM remunerated to support a lower cost lower AUM model.
We need the decision makers ( ie the half a dozen or so execs in each of the FSCs etc) to be compelled into CDC for this to have traction.
Govt / DWP would be better targeting its mandation bullets towards CDC as the default (or only !) option for all savers / workers on salaries under [£60k, say].
Better outcomes, more growth from longer term investment objectives (and abandoning the intellectually weak ‘’flightpathing’ of DC), and fairness across income levels, and less cost to Treasury. Who loses out? Oh, it’s the AUM junkies who hold the DWP’s arm up its back.
If it ain’t broke…
But if it’s not working (for working people and the economy) take a sledge hammer to it. Not radical thinking. Just common sense, and doing the right thing!