At ten past ten this morning we will have a session established by Pensions UK to discuss whether Collective CDC Pensions are a “massive headache”. As well as the important lawyer we will have representatives of the unions, of a proprietor of a soon to be Collective Pension and an employer considering participating in one.
I wish I was there and I hope that they will get another packed out hall as the first session on Tuesday did. Here’s what I’m missing.
Collective Pensions need de-mystifying in my book!
They’re a benefit offered to staff that gives them a wage in retirement. If we are in the business of making things simpler for staff, it can’t be much simpler than CDC.
Members get a tax free cash sum as they had with their DC scheme but this time they get an income for life unless they choose to opt out.
I hope that all Collective Pensions require an opt-out for them not to pay a pension to a spouse if there is one and if the pensioner dies first.
I’m sure that all Collective Pensions will be paid with inflation protection as standard. Sure sometimes it may be more than CPI, sometime less but only twice in 100 years would it have delivered a pay cut.
Pretty easy for ordinary people
The UMES version of CDC works for members just as any other workplace pension does. We are auto-enrolled in and we have to opt-out to get out, doing that will lose you employer payments buying you pension. So it’s a pretty easy business staying in – no difference.
Pretty easy for employers
It’s pretty easy for employers who have to meet auto-enrolment rules set by TPR but employers are doing this already. So it’s a pretty easy business participating in one if you’re an employer.
What’s all the fuss about?
The hard bit’s left for the trustees and proprietors of these Collective CDC Pensions. Going through the business of getting funded and then getting authorised it is a tough business for CDC plans. It should be. If people are going to swap pay today for pay in 30 or 40 years they need to know they’re dealing with a pension plan that’s going to last as long as they do!
So there’s a CDC Code issued by the Pensions Regulator which is long and rigorous in what it asks from a Proprietor and Trustees. But that is not a business that employers and their staff should worry about. When they choose an authorised CDC plan they have assurance that they have a properly regulated promise to pay a retirement wage as promised.
We want Collective Pensions to be hard because we like hard!
Let’s look at how we’ve made DC schemes
- Pots – who knows how to turn a pot into a pension? It’s what Bill Sharp called the nastiest problem in finance.
- Investments, although more than 90% of us don’t want to make a choice and default, DC pensions offer a range of investments that take an expert to choose from – a multi flavour selection when we just seem to want vanilla
- A host of choices when we want our money paid back – “decumulation” as we call the process (as if anyone uses that word elsewhere!)
We need DC saving to be hard because if it wasn’t there’d be very little to think for savers to think about. Infact many people don’t think about it and take their cash in one go as soon as they can despite it often being ruinously expensive to them in tax!
So what’s the massive headache?
I think that change is difficult and can be an headache. It was hard and a headache when we lost the promise of a pension when our private final salary was closed and we could no longer build up pensions.
Now that it’s coming back is seems hard and a headache to another generation who have grown up with pots and not with pensions.
Of course, most savers think of their pension as what comes from the State and many will never have had the prospect of a payment into their bank account each month of the promised pension.
But if you said to people would you like some extra paid on top of what you get from the statement – everyone would say yes!
It won’t be much more than a top up to the state pension to most people. If we want to be honest about CDC -it’s far too easy for most of us pension people. We’re offering a benefit linked to what they earn, a link to what people save and a wage for life which is no more than deferred pay.
The question I’d submit if I was at Conference today, is why did we ever think CDC a massive headache?