"Royal Mail CDC pensions ‘could outperform DB as well as DC"

 

Recently I completed a research project into Pension Provision for Housing Association staff. In the project I mentioned the pros and cons on the new CDC (Collective Defined Contribution) schemes that have very recently been allowed to operate in the UK.  I came across this video and article by CWU union who are very supportive of CDC for Royal Mail. 

"Latest actuarial modelling suggests the new Royal Mail CDC/DB pensions scheme could provide returns some 70 per cent higher than current Defined Contribution schemes and CDC schemes could even outperform Defined Benefit, says our DGSP Terry Pullinger in his video update to members today (7/10/20).

Work done by Wills Towers Watson Actuaries suggests “that the CDC scheme, on average, would produce 70 per cent more for an individual than a DC scheme and 40 per cent more, currently, than a DB scheme,” Terry explains, adding: “Now that is massive news and will certainly shake up the pension world.”

Defined benefit pensions schemes are, he reminds us, still considered “the ‘gold standard with guaranteed outcomes,” but adds that Wills Towers Watson’s performance modelling, “which has gone on ever since we created this scheme, even through the Covid period” suggests that CDC schemes “would on average actually produce a better benefit.”

Today sees the Pension Schemes Bill return to the House of Commons for its Second Reading, after which it moves into its final Stages and, providing it progresses, will then receive Royal Assent and pass into law.

Opposition to the Bill is not expected, although MPs will, no doubt, be looking carefully at the legislation and ensuring that it meets all of the usual stringent tests for new legislation.

If the progress of the Bill continues as currently scheduled – and it will become the Pension Schemes Act once it has received Her Majesty’s formal approval – Terry anticipates that the Royal Mail CDC Scheme would likely be introduced into the company “at some point next year” and “bring all our members into one ‘wage in retirement scheme.”

CWU members are warmly praised by our DGSP, who thanks them for the tremendous support” they gave to the union’s 2017 Four Pillars campaign, which was so powerful that it forced Royal Mail and the CWU into designing a new and unique on-going agreement on pensions that still offered a wage in retirement, and that led to this ground-breaking development.

Back in 2017, Royal Mail workers in the company’s DB scheme were faced with the prospect of being transferred into the DC scheme. DC schemes were once seen as the answer to reducing DB provision, but time had suggested that the outcomes for DC members would be insufficient to sustain dignity in retirement.

“So we were insistent that there must be another way,” explains Terry, “and we refused to accept that the only answer was a lump sum paid out when you retire, which wasn’t producing the best results and was insufficient to sustain people through their old age.”

Eventually, as a key aspect of the Four Pillars agreement, both the CWU and the business agreed to find a better solution, he continues: “We both got on the same page to develop the art of the possible.

“How to create such a pension scheme.”

With help and expert assistance from First Actuarial, who have aways been a great support to the CWU, and other unions, as well as Wills Towers Watson and others who support Royal Mail, the principle of a CDC scheme – a collective, shared-risk scheme – was agreed and a specific, Royal Mail CDC scheme was designed – and robustly modelled.

The scheme would replicate the old DB scheme in design, producing a wage in retirement generated via CDC and a guaranteed lump sum.

Although CDC in different forms is used in other countries, such as Canada, Denmark and the Netherlands, no scheme of its type has previously existed in the UK and so legislation was required.

“I know that it’s through the collective strength of CWU members that we’ve managed to achieve that,” insists Terry, who makes the further point that, as well as being beneficial to Royal Mail workers, the precedent set could also be “a game changer for many working people.”

For workers in other companies, “this could make a massive difference to their lives and certainly to what their retirement might look like,” he suggests, adding: “Hopefully it will encourage other employers to move away from DC and into this type of scheme, CDC, so that people can get back to having a Wage in Retirement and dignity in retirement.”

The CWU does not support any sense that CDC should replace DB schemes and believes that DB schemes are the ‘gold standard’ and will remain so until time suggests otherwise.

However, for CWU members, the modelling is excellent news that supports our view that we have found a way to give our members a genuine pensions that produces a wage in retirement.

After describing the current situation as “a big moment, a massive moment,” Terry gave a “massive thank you to all of our members who backed this union unanimously,” and that this is clear evidence that we only get what we deserve if we negotiate from a position of strength.

“It’s been a long time waiting, but we’re getting closer and closer,” he added.

How much should I put in a pension?

This morning I gave a  presentation on Housing Associations Pensions provision to my TUC Employment Law Course. 

One of the issues I discussed is "How much should I put in a pension"?

If you are in a "defined benefit" scheme (sadly - and wrongly, mostly only in the public sector nowadays) then the employee contribution is set but most workers are now in "defined contribution" scheme where they have to decide how much to pay into their pension. 

At my first ever TUC Pensions course (back in the day).  FBU firefighter and our TUC tutor, Terry Seagers,  gave a rule of thumb, that you need to put 20% of your income (including employer contributions if not self employed) into any pension scheme for 40 years to have a reasonable chance of pension equivalent to half pay at retirement and a lumps sum. 

There is a quasi scientific method much beloved by pension marketing pundits which says "tell us how much you want on retirement and when you want to retire".  They will then calculate what you need to put away in order to try and achieve this. This usually results in the demand for a contribution rate that will make you faint. 

Another "rule of thumb" which is as good as any other is below. But who knows. This is one of the many problems with DC and why we really need a different way to provide pensions :-

Take the age you start your pension and halve it. Then put this % of your pre-tax salary into your pension each year until you retire.

So someone starting aged 32 should contribute 16% of their salary for the rest of their working life. While 16% of your pay seem a huge commitment, this figure includes your employer's contribution – so you "only" need to fund the rest. ("only" my italics) 

https://www.moneysavingexpert.com/savings/discount-pensions/

TUC Pension conference 2021: Day 1 Minister Guy Opperman MP & panel discussion on Just Transition

 

I joined the start of the virtual conference today.  It was interesting to hear pension minister, Guy Opperman MP speak positively about defined benefit pension schemes. I wanted to ask him why then does the regulator appear to want to treat all open defined benefit schemes as if they were closed (to new members or future accrual) but he was not able to stay for questions. Next time. 

If you haven't already, I believe that you can still register for the next 3 events listed below

"THE FULL PROGRAMME AND SIGN UP CAN BE FOUND HERE: HTTPS://WWW.EVENTBRITE.CO.UK/E/TUC-PENSIONS-CONFERENCE-FAIR-PENSIONS-FOR-ALL-TICKETS-141667161293

Day 2: Tuesday 16th March, 13:00-14:00

Fixing the holes in auto-enrolment

Auto enrolment has brought millions of people into workplace pensions. But millions more are still excluded, and too many of those who are auto-enrolled are not building up enough pension to maintain living standards in retirement. This session will explore who's falling through the gaps, what impact Covid-19 has had, and how we can make sure auto-enrolment delivers decent pensions for all.

- Josephine Cumbo, global pensions correspondent, Financial Times

- Chris Curry, director, Pensions Policy Institute

- Joe Anderton, pension officer, Prospect

- Cara Pacitti, economist, Resolution Foundation

Day 3 Wednesday 17th March 13:00-14:00

Making a success of collective DC

Thanks to the hard work of the Communication Workers Union, the Royal Mail is preparing to introduce the UK's first collective defined contribution pension scheme. By pooling investments and sharing risk, these arrangements can deliver more generous and stable retirement incomes than individual DC. So how can more employers be encouraged to offer CDC, and what can we learn from Canada, where unions have been involved in running this kind of scheme for decades?

- Terry Pullinger, deputy general secretary (postal) CWU

- Chris Roberts, director of social and economic policy, Canadian Labour Congress

- Shriti Jadav, director, Willis Towers Watson

Day 4: Rethinking the role of the state pension

The UK provides a significantly lower state pension than most comparable countries, and relies more heavily on occupational pensions to provide retirement incomes for its citizens. Our system is deeply ingrained and has its merits, but is it time to rethink this balance? Would a bigger role for the state pension reduce pensioner poverty and inequality?

Panel debate

- Dr Bernhard Ebbinghaus, professor of social policy, University of Oxford

- Nathalie Diesbecq, ACV-CSC (Christian Federation of Trade Unions, Belgium)

Closing keynote

- Jonathan Reynolds, shadow secretary of state for work and pensions

Is it time for schemes to run to safety? Professional Pensions Opinion Piece

As concerned pension funds are flocking to 'safe' assets or buying equity protection, John Gray points out there is no such thing as a 'free lunch' in life

There is an ancient saying attributed to Saint Teresa of Avila that "More tears are shed over answered prayers than unanswered ones." 

I think that most pension trustees have been grappling with what to do about the ongoing highs in the equity markets and whether (or when) there will be the inevitable market correction. Returns have been exceptional for some time and many funds have made a lot of money. Is it time to run to safety or is it truly ‘different this time'?

Many active fund managers have been sitting on their hands for a long while, refusing to invest in what they consider to be an overvalued market that is bound to crash and destroy value. However, this has impacted on their performance, which has suffered accordingly.

Some funds are moving out of equities, realising gains and locking into what they believe to be ‘safer' and less volatile asset classes.

Other funds are buying complex ‘insurance' products that for a fee will protect against market losses or can even offer protection for no apparent cost (instead of an upfront fee you give up on gains from possible future market rises). 

There is, of course, no such thing as a ‘free lunch' in life. Most open public and private defined benefit (DB) schemes (yes there are still open private schemes) are dependent on taking long-term equity risk to meet their obligations. If they reduce their exposure to equities then they may have to increase contributions. 

There is also the argument that pension funds are in for the long run - so why worry about short-term temporary movements? Equity markets always recover eventually and then go on to more record highs… don't they?

I remember a few years ago funds being strongly lobbied to take out similar insurance products. Since then markets have risen even further and if they had bought then this would have meant unnecessary costs and/or lost equity return opportunities.

To complicate matters further for us poor trustees, there are also voices out there arguing the risk is overstated and that equities are not necessarily overpriced in all markets. Twice now in recent months I have attended pension conferences and heard positive views on the near future. This included a respected economist of a major international bank and a senior investment manager of a large mainstream equity fund. There were ‘ifs and buts' expressed about the impact of Brexit and Trump etc. But it was not at all doom and gloom.

Meanwhile, elsewhere I have heard very robust arguments that we are about to go over a cliff edge.

The elephant in the room is fund valuations. If the market does crash at the eve of a valuation and it results in massive deficits then that will cause all sort of problems for these funds. So you could understand the temptation for funds to be defensive and ‘safety first' even though there will be costs.

Let's leave aside for the moment about whether it is really a good idea to drive pension investment decision-making on the basis of what is essentially an artificial ‘snap shot' of inherently volatile valuations. I think it does make sense to crystallise some of your gains and take defensive measures. If your fund is currently nearly fully funded (like most local government pension funds) then why take the risk?

The current positive funding level of so many DB funds does make you wonder why so many people wrote off DB schemes and closed them at huge cost in the private sector. But let's leave that aside for another day as well. 

John Gray is chair of the Newham Council Pension investment and accounts committee, writing in a personal capacity

Decent pension provision is not dying out - it's being murdered

A headline in last Friday's "Professional Pensions" was "DB surplus hits record high of £382bn on best estimate basis, says First Actuarial"

It is becoming increasingly clear that the the huge decline in decent pension provision in the UK (employer defined benefit schemes) is mistaken and even completely unnecessary. Millions of workers in this country will retire and die in poverty because of this.

Pension schemes were valued according to outdated and irrelevant accounting measures which pretended that they had huge unmanageable deficits. It was a little bit like telling someone who had just taken out a 25 year mortgage to buy a home that they were really bankrupt since they could not immediately pay off the loan.

6 years ago the AMNT argued that defined benefit schemes were affordable and stopping workers from joining or closing schemes was a nonsense.

Instead of using a broken yardstick to measure present and future costs, First Actuarial, have produced an index based upon a prudent estimate of investment performance. They calculate that the 6000 defined benefit schemes left need an actual return of only 2.6% per annum to pay its pension promises. While the stock market will go up and down, unless you honestly believe that the end of capitalism is nigh, surely in the long run, this return is more than achievable.

Last year there was a series of bitter strikes by University staff opposed to the dismantling of their supposedly bankrupt pension scheme USS. Under best estimate calculation they could have a surplus of £10 billion.

If you think I am angry about this situation then read below Death by Discount Rates

"Discount rate controversy is nothing new. One rarely, if ever, hears people in the industry say that using the yield on high-quality corporate bonds (as accountants do), or a rate just above gilt yields (as most actuarial valuations do) is without problems.

But the flaws are more serious than many realise. The theoretical case for these rates is acutely defective. They have wrecked company balance sheets, caused the misallocation of billions of pounds of corporate resources to plug illusory deficits, distorted scheme investment strategies, and played a major part in the collapse of private DB provision. If a disaster even a fraction of the size had befallen the state pension system, governments would have been voted out of office. It's a national scandal."

Frank Curtiss is the immediate past president of the ICSA and the former head of corporate governance at RPMI Railpen. Tim Wilkinson is the former chief accountant at RPMI Railpen

"The nastiest, hardest problem in finance"

Check out top pension blogger Henry Tapper on why 85% on those able to transfer their pensions out of a DB (defined Benefit Pension scheme) would be best advised not to take it (or F...k'n bonkers to do so - in my non financial advisor language)

"In July, John Ralfe wrote what (for me) is still the best summary of the situation facing members of the British Steel Pension Scheme. If you have an FT account you can read it here.

I will quote the section where John talks about the value of retaining rights to a pension as it is as relevant for a BSPS member as for anyone else. It is an exceptional piece of writing.

Cashing in a defined benefit pension means giving up a guaranteed monthly income, increasing in line with inflation, usually from age 65 until you die, and half this amount for your surviving spouse.

Once the pension is cashed in, the decision cannot be reversed.

A final salary pension provides complex guarantees, including longevity — not running out of money, however long you live — and investment performance, as the monthly payout will continue regardless of investment returns.

The value of these guarantees to an individual member may be low if they are wealthy and their chances of running out of enough money are tiny, however long they and their spouse live.

But most people are not so wealthy and because their pension is a large part of their overall wealth, these pension guarantees are very valuable.

Make no mistake, how much to spend in retirement, so you don’t run out of money, is the most complex financial decision anyone has to make. Even Nobel prizewinner Bill Sharpe recently described it as “the nastiest, hardest problem in finance”.

Anyone looking at cashing in their pension now with high transfer values shouldn’t think they are making a financial-genius play on future real interest rates, future equity returns and their life expectancy. They especially shouldn’t be fooled into thinking they can rely on holding equities for the “long run” to replace their guaranteed pensions. The expected return from equities is not a loyalty bonus, but is just the reward for taking risk".

Should DB schemes open to new members get special treatment? (and why DC schemes are so rubbish in comparison)

I had a name check in this interesting article below. Modern defined benefit (DB) pension schemes are the only way that ordinary working people will be able to enjoy a secure retirement.

I recently pointed out to a journalist that in the DB Local Government Pension scheme (which I am member) employer and employee contributions are currently capped at 19.5% of salary yet this should provide a reasonable pension for staff who have worked for 40 years.

I asked him if he had calculated how much of his salary would have to be invested in a Direct Contribution (DC) pension to match the benefits of the LGPS DB? He said 70% of his salary.

Nuf said?

I really hope that the Labour Party manifesto will include a commitment for a rebirth of Defined Benefit Pension schemes.

"Professional Pensions

at a glance Private sector DB schemes are in decline but 737 remain open to members Some argue running them differently to closed schemes might increase their sustainability. Others worry two sets of regulations could cause problems

With one in eight DB schemes still open to new members, Michael Klimes explores the argument that they should be run differently from closed ones

Defined benefit (DB) schemes have been in decline for a long time, with the past few years seeing an increasing number closing to future accrual or new members.

Sponsoring employers have been shutting schemes due to the higher cost of running them, driven by longevity improvements and sustained low gilt yields.

According to the Pension Protection Fund's Purple Book 2016, 737 or 13% of 5,794 total DB schemes are open to new members as at 31 March 2016. Of these, 6% have active members, which translates into roughly 700,000 people.

However, there is a view that defined contribution (DC) provision is inadequate and that DB schemes provide better income and therefore should remain open.

Some even argue the government should consider introducing regulations to allow open DB schemes to be run differently from closed ones.

Open vs closed

First Actuarial founder Hilary Salt believes open DB schemes should be allowed to be run differently from closed plans for three reasons: Their time horizons are much longer, the employer is not focused on a buyout, and the scheme can benefit from the fungibility of money.

"Because the scheme has no need to sell investments, it can invest in more volatile but long-term, higher return asset classes," she explains. That makes the scheme better returning for all its members - or in other words, it produces pensions more efficiently.

"The difference means an open scheme can invest more productively in long-term assets - in the kind of infrastructure projects we need to rebuild the UK economy and solve the productivity puzzle."

However, the discussion skews the advice given to trustees. "As the general expectation is that employers don't want any risk in their schemes and just want to be rid of them, advice narrows into how to best reduce risk - which basically means buy more bonds and aim for buyout," Salt adds.

Therefore the efficiencies of open DB need to be highlighted carefully as there is a tendency for people to misunderstand them. "Some just say that if a scheme is relying on new members, it's a Ponzi scheme - but this is not the case," she adds.

As pension contributions can be used to pay the benefits of existing pensioners, this makes open DB schemes more efficient than DC, she argues.

"The money to pay for everyone's pensions is being saved but the scheme is simply providing benefits for past, current and future generations of workers in the most efficient way for the employer."

Tower Hamlets local government scheme pensions board member John Gray agrees, arguing the debate about DB has not helped. "There has been a huge error when we discuss the running of DB schemes. Closing DB schemes does not get rid of the deficit as the investment moves away from equities towards bonds. That generates lower returns and employers have to put in more money. Well-run open schemes are safer and more sustainable."

Two sets of regulations?

How might the government encourage open DB schemes to carry on? One way could be for the government to skew tax relief for sponsors that provide some element of DB in their pension offering to employees. However, this is unlikely given the stance of the Treasury.

A second option is to look at some type of compromise between DB and DC such as the risk-sharing proposal at Royal Mail. In March the Communication Workers Union (CWU) called on the postal service to merge its DB and DC members into a risk sharing scheme as a compromise for closing its current career average DB scheme to accrual.

However, Royal Mail argued it would be too risky and has instead offered its employees a cash balance DB scheme.

Pensions Management Institute president Kevin LeGrand is sceptical the government wants to revive DB and thinks there would be many challenges by having different regulations for open and closed schemes.

"It would be very difficult to run two types of regulatory regime, dependent upon this difference in status and I'm not sure where the differences would be," he says.

"For example, one might say that funding approaches should be different, with an open scheme perhaps being allowed to carry a larger funding deficit. But that can be done under the current rules, and in any case might depend more on factors such as the strength of the employer's covenant, rather than the status of the scheme. Any differences of approach might in future be more likely to be driven by political views."

Barnett Waddingham senior consultant Malcolm McLean thinks technical discussions about the management of open DB schemes, closed DB plans and DC arrangements must not leave out members.

He says: "At the end of the day we want the pensions system to work and be most advantageous for their members. At times we [the industry] can lose sight of the point of pensions. Sometimes I go to conferences and the members are not even mentioned, just the mechanisms and logic."

With one in eight DB schemes still open to new members, and as DC is still evolving, it is sensible for the government to consider different regulatory approaches for open schemes. However, any change must be carefully thought through".

Can we have a national DB pension scheme?

My latest article for Professional Pensions. "John Gray says we need to do all we can to preserve defined benefit pension provision in the UK

Those of us who live in the real pension world know it is true but many are in denial. For entirely understandable reasons, the pension industry just don't want to admit it. So come on folks and get out of the pension closet and collectively shout out loud that defined contribution (DC) pension schemes are usually pretty rubbish. 

The government green paper on the future of the defined benefit (DB) schemes may indeed be an attempt to justify the slashing and burning of pension promises but it is also an opportunity to make the opposite case and call for a rebirth of DB.

Recently I was at the TUC annual pension trustee conference and there was a fascinating panel debate on the future of DB. Of course, the 'usual suspects' (progressive actuaries and trade union pension officers) pointed out that there is still a huge (and growing in some sectors) DB pension provision in the UK and that despite some genuine problems these schemes are still affordable, if you ignore the 'Mad Hatter' valuations and assumptions by those who confuse being prudent with being totally risk free.

I raised a question to the panel about why DB schemes are being written off when there is a contribution cap for future accrual in my DB scheme of 19.5% of payroll for employers (13%) and members (6.5%). Meanwhile our new employees, who do not now have such access, need to put away the equivalent of up to 50% of their pay (dream on) to receive similar benefits when they retire in a DC scheme.

Is there an alternative to DB?

Isn't it obvious that DB is better for workers than DC? The half way intermediate schemes such as collective DC or hybrid DB seem to be getting nowhere. There is simply no alternative to DB.

The key note speaker, economist and writer, John Kay gave a brilliant speech at the end of the TUC conference in which he admitted that he thought we had failed the modern generation on pensions. He told us about how recently he had spoken on pensions at a seminar and afterwards a young woman in her 30s had asked his advice about what personal pension she should start? The question had shaken and upset him to think that frankly, his advice should have been it was actually hopeless for her to start anything at her age.

Let's face facts. Many people who will only have access to the state pension and some DC pension savings will not be able to afford to retire. They will have to work until they drop. If they do retire (or get sacked under workplace capability procedures) they face at worse poverty for the rest of their lives and at best certainly nothing like what they would have expected as a standard of living after a lifetime of hard work. Many more will still be dependent on means tested benefits.

We have a national NHS but why don't we have a National DB pension? If the government gave it a Crown promise why can't we open up the Local Government Pension Scheme to everyone including the self-employed? Merge it with the Pension Protection Fund and private DB schemes for efficiencies and economies of scale?

The new government consultation on DB is timely and we should all respond and demand that the government acts to fulfil its duty to its citizens that they will not die in poverty in their old age. The best mechanism to do this is by modern DB schemes open to all, regulated and guaranteed by the state.

John Gray is admitted body union representative at the London Borough of Tower Hamlets Pension Board. He is writing in a personal capacity

La La Defined Benefit Pension Deficit calculations

I have long been very sceptical about the Daily Torygraph headlines about defined benefit (DB) pension schemes being "in massive deficit", "gold plated" and/or "unaffordable". Check out this paper below by Dennis Leech, Emeritus Professor of Economics, University of Warwick. The way that we calculate the liabilities of these schemes are just nonsense. This means that so called deficits are hugely exaggerated and cause deadly problems to company balance sheets.

Sustainable DB pension schemes have been and are being closed left, right and centre due to broken, La La accounting measures.  Millions and millions of workers are being robbed of their pension futures for no good reason. Robert Maxwell's rip off of the Daily Mirror pension scheme is small beer in comparison .

"Pension deficits: mark–to–market valuation is the elephant in the room

The chief economist of the Bank of England, Andy Haldane, has said he hasn’t a clue about pensions. It is not surprising when so many occupational schemes have a deficit that stubbornly just keeps on growing. They have agreed a recovery plan with the pensions regulator to ensure there will be enough money to pay the pensions promised when they fall due - but still the deficit grows seemingly uncontrollably.

The latest estimate for the total deficit for defined benefit schemes eligible for entry to the pension protection fund was £383.6bn at the end of June 2016, up from £294.6bn at the end of May an increase of £89bn in one month. The combined funding level has fallen to 78 per cent, close to its lowest ever level. There were 4,995 schemes in deficit and only 950 schemes in surplus.[1]

The blame for this is most often put on the fact that pensioners are living longer than expected. But that is not convincing and can be only part of the answer: deficits are changing too fast to be due to something as slow moving as longevity trends - that are anyway allowed for in the recovery plans that have been devised. The other explanation often trotted out is the catch-all ‘market conditions’ which covers a multitude of factors. This usually means low interest rates, casually and wrongly equated with poor investment returns.

No. It is the regulations governing pension scheme valuations that are mostly to blame for this unsustainable situation. They are the elephant in the room of the pension deficits story that is being ignored by most of the industry. They are not fit for purpose and urgently need to be revised. They force pension schemes to have to deal with extraneous – even spurious - risk factors which exaggerate deficits. The effect – as we have seen in recent years - is to force many schemes to close.

Deficits have grown substantially since the 1990s when minimum funding requirements were introduced. The 2004 Pensions Act set up the pension protection fund to reduce the risk of pensions failing due to the sponsoring company failing. But it also tightened up on funding rules and imposed an inappropriate market-based valuation methodology[2]. Accounting regulations based on this methodology are at variance with real-world economics. They are based on a purist belief in markets as a source of information - ignoring all evidence from academic economics, both empirical and theoretical, showing the limitations of markets as providers of information. They were intended to prevent pension schemes needing to enter the pension protection fund but in fact have had the reverse effect by making sponsor failure more likely.

It is only policy makers who can deal with this problem. They need to take an overview of the consequences of mark-to-market accounting and revise the valuation regulations in the light of experience.

... To continue reading access the full paper here or here.

The Emperor has no clothes. DC Pensions

From Professional Pensions "John Gray looks at whether current contribution levels across DB and DC are adequate.

As well as being an employee representative on a pension board I am also a UNISON trade union branch secretary with members in more than 140 different private and public service employers.

While I am pleased that auto-enrolment (AE) has taken off so far, I am astonished about how little money employers are paying into pension pots. While many do pay more than the statutory requirement, we see well known national organisations with supposedly good reputations paying peanuts into their employee pension schemes.

If you put in only the AE 8% then you will be retiring and die in relative poverty.

I remember my first ever TUC pension course and our tutor (by coincidence the father of present day PLSA CEO, Joanne Segars) telling us there was an unscientific rule of thumb that you need to put around 20% of your income into a pension for 40 years to retire on half pay and receive a lump sum. Since workers cannot afford to pay 20% into their pension the employer has to pay the greater share.

Whenever I repeat this story to trade union members and to employers they are genuinely horrified at both the amount and the length of time needed.

I know this 20% rule of thumb is full of holes but recently I went to the website of a well-known stakeholder provider and spent a little time on its pension calculator site. While there is no such thing as a perfect projection I was pretty shocked at what I found.

How much?
I used the example of a worker aged 28, who has no existing pension provision on £30,000 per year, who is planning to retire in 40 years' time at age 68. I worked out that not 20% but a ridiculous 50% (£1,250 per month) of their income would have to be invested in order to hopefully retire on half pay (with no lump sum).

If you include the projected state pension you will still have to pay in an eye-watering 34% of your income (£850 per month). So only paying 20% into your pension for 40 years will actually get you nowhere near half pay. If you put in only the AE 8% then you will be retiring and dying in relative poverty.

Okay, maybe under AE a 28-year-old will by that age have some existing pension provision. Current investment assumptions may prove to be wrong and be too pessimistic. Perhaps the industry will really drive down costs and charges (including hidden fees) and increase return. Annuity rates could improve?

Maybe, maybe not. Young people have student loans to pay off, sky high rents to cover while also trying to save for a mortgage. While retention rates for AE have been much higher than expected, this might change. Especially if people think it is not going to be worth it. Current investment assumptions could prove to be optimistic. The industry is very good at side-tracking attempts to cut its charges and annuity rates could remain the same for decades.

So let's keep the 34% of income figure. It's a good enough guess as any I think. Now, should the union be arguing with employers to be paying, say, 26% employer pension contributions and employees 6%? I can imagine the response. Let's face up to it – defined contribution schemes are just not going to deliver.

But why is it some of my union members still belong to a good-quality, national, career average defined benefit schemes, whose total cost for future actuarial is capped at 18.5%? With the employer contribution a maximum of 13%? Surely it's time to think again about modern defined benefit schemes?

John Gray is a London Borough of Tower Hamlets Pension board member though he is writing in a personal capacity

Local Government Pension Scheme is safe and substainable

Check out this response to amongst the daftest report ever by a right wing think tank.

It is more than a shame that organisations such as the Centre for PolicyStudies (CPS) feel they have to temper their reasoned attacks on the financial services industry for ripping off the Local Government Pension scheme (LGPS) with such bizarre sectarian silliness.

The Local Government Pension Scheme unlike all the other public PAYG funds has collectively some £200 billion of assets and face liabilities over a 60 years or more time frame. There is no crisis.

If we were not being cheated by the financial service industry there would be no real affordability issues with the LGPS. If we also did not have such a weird and broken yardstick of measuring LGPS liabilities then nearly all our funds will be in surplus.

Why don't we open the LGPS to all UK workers including the self-employed? Everyone deserves a decent pension and unless you are rich nearly all alternatives to a defined benefit pension scheme just will not deliver.
 
"Dismissing the Centre for Policy Studies report on the local government pensions scheme (LGPS).......,

UNISON head of pensions Glyn Jenkins said:

“UNISON fundamentally disagrees with the conclusions of this report. The LGPS is both safe and sustainable – being funded both by contributions from scheme members, employers and investment income.

“Scheme investments generate a significant portion of the income so the taxpayer is not paying the full increase in employer contributions. The report misses the fundamental point that if the cost of benefits increases, that increase is shared with scheme members.

“Scheme benefits did not improve in April 2014 as the report claims. It was fully costed to be lower in value, and the build up rate is higher now because retirement age has increased.

“It is not that the current LGPS is unsustainable that has caused past service deficits to build up.  Messing around with current benefits will do nothing to reduce the deficits caused by employers paying in too little or taking contribution holidays in the past.

“UNISON takes the issues on costs and governance seriously and has around 200 trained members on fund boards who push for greater transparency on scheme costs.

“This doom and gloom report implies that there will be no recovery in UK investments and that yields will never recover, whereas we know that although there are always ups and downs, the indicators are that markets will recover.

“It is over prudent assumptions on growth that is killing the pensions future for workers all over the UK, and giving rise to the fiction that adequate pensions are unaffordable.”

Ryanair Robbing Pensioners (and pension peril of zero hour contracts)

According to the FT controversial airline Ryanair is closing its Pension fund for staff in Ireland and transferring their accrued defined benefit pension scheme benefits to a defined contribution scheme - in which future benefits will depend on investment performance???

Not only are they doing this to active (current) members but also to former staff who have left their pension with the scheme.

Does this mean that staff who were promised a guaranteed pension will now have to face the uncertainties of the investment market? Why did the trustees agree to this?

Yet I understand that many of the new Ryanair staff can't even join the DC scheme as they are 'self employed' on zero hour type contracts!

So it seems that all staff in Ryanair former, past and future will be stuffed.

Except I believe its senior management.

No surprise there!

Hat tip Pension Biggles

Defined Benefit Valuations: Hilary Salt from First Actuarial - TUC Pension Trustee Conference 2013

The 2nd speaker on the TUC "Defined Benefit valuations" session after Con Keating was Hilary Salt, from First Actuarial.

Hilary asked what was the purpose of a pension scheme? Answer: to pay the right amount of money at the right time.

Assets are needed to make sure that the right amount of money is available to pay the pensions as they are needed. Other issues such as
Liability-driven investments (LDI) have no impact on the amount of pension and are a distraction.

The argument that you need assets to pay for the last man (or women) still in the scheme is self defeating.

You should focus on future income streams. Valuations should be periodic checks but you need to play the ball from where it is and look forward, not look back.

Valuations are used for the wrong things. Expensive "Buy outs" by of schemes by insurance companies are irrelevant since the Pension Protection Fund (PPF). 

Accounting valuation funding is too short term, buy outs are irrelevant, "Flight plans" or "Glide paths" just move assets into bonds to reduce risk and import the inefficiencies of Defined Contribution (DC) schemes into DB.

Hilary had a Q&A after the presentation with Con chaired by Nicola Smith from the TUC. I asked them the question "What should we DB pension trustees should do next about the "scare mongering" about deficits that we have heard about".

Con said we should be prepared to challenge our actuaries. They do not use true and fair value. While Hilary said we must be ready to challenge the Regulator over valuations.  It can't be right that its okay if the reason that no one loses a pension is because they never had the chance to have a pension in the first place.  (Think about this)

Usual health warning that my hurried notes on these presentations on my Blackberry may not be an verbatim acount.

PS It was good to see Jimmy Nolan, former trade union trustee from the Liverpool Docks pension scheme at the conference ask a question. For as long as I have been going to TUC pension conferences, Jimmy has always been there. 

"Valuation is a Dark Art" Con Keating at TUC Pension Trustee conference 2013

Picture of Con Keating, Head of Research at Brighton Rock making our heads hurt at the TUC Pension trustee conference last month.

Many people nowadays say defined benefit pension pension schemes are "dead".  They are unaffordable, volatile, people are living longer etc. 

Con travels to South Korea as a consultant to set up brand new Company DB schemes despite the Koreans having amongst the highest life expectancy in the world. 

In a nutshell Con makes the argument that the way we measure DB pension investment values and liabilities is just absolutely wrong and schemes have been closed down left, right and centre for no real good reason whatsoever. We should instead measure on a "fair value" approach.

Instead of outdated,  unstable and irrelevant "mark to market" valuation you should be more concerned with cash flows and the ability of the pension scheme to pay its actual liabilities not what it might cost in 60 years hence.

Why most Company Personal Pensions schemes are so rubbish

If you want to know why Defined Contributions (DC) Pension Schemes are usually so rubbish compared to Defined Benefit (DB) then this Office for National Statistics (ONS) chart will give you a clue.

Not only are all non trust based UK DC schemes lacking in governance they all have uncertain outcomes,  are often expensive and most will simply not deliver for their  members.

Many of whom will have to work until they drop or retire into and then die in poverty.

While Defined Benefits schemes are nearly always better for employees than any alternatives, the main reason they are so is employer contribution levels. Average DB employer contribution is 14.2% (not at all an unrealistic level in my view) while in a DC it is an inadequate 6.6%.

I would guess that under auto-enrolment (a good thing but employer contribution only has to be 3%) will bring the average DC contribution level even further down. The current rock bottom annuity rates are making things even worse.

An old rule of thumb in pensions is that you need to be putting in at least 15-20% of your wages (employee and employer contributions combined) for 40 years to aim for a pension of 50% and a lump sum.

AMNT Summer Newsletter 2013: The Minister, the Researcher, the Polemicist & Red Barry

 Dear Member’s and Friends

The AMNT year so Far

This is our latest email newsletter. 2013 has been an exciting year so far for the AMNT. Our membership has continued to grow. We have made significant contributions to government and regulatory policy on pensions and trusteeship. We have held successful and well attended open meetings and make our presence known by speaking in conferences and writing articles for the pension press.

We have been successful in our fund raising and have now employed an administrator, Kate Bendy, on a part time basis to support the AMNT objectives and our volunteer executive committee.

Pension Minister Steve Webb speaks at AMNT Summer Conference

Picture of our Joint Chair, Janice Turner, with Pension Minister Steve Webb MP, who was the keynote speaker and took part in a Q&A at our Summer Conference, “Where Now The Pension Promise?” on June 26th hosted by Towers Watson.

As well as the minister there was presentation on different pension schemes by members of the AMNT (USS, LGPS & HSBC).

Ewan McGaughey, a researcher from the London School of Economics, described the AMNT as “unique” and “the most important development in Pension Governance in 50 years”! While the ever so quiet and retiring Michael Johnson, research fellow at the Centre for Policy Studies (CPS), gave a well received “Trustees: take no prisoners” speech on “Charging in Pensions”.

All the speeches are now on the AMNT website here

There was also a showing of the new AMNT DC and Auto-enrolment video kindly developed with Barings Asset Manager.

The Anonymous Trustee Question?

Each newsletter we are planning to allow a MNT to post a question on a current issue – if you have an answer for this question then do so on the AMNT LinkedIn site or email mail@amnt.org

“The Final Salary scheme of which I am a Member Trustee has gathered up people from various prior schemes and has endeavoured to match the pension terms that each member had before. So, we have several different ages from which the member may retire without actuarial reduction, many well before their 65th birthday. Trustee consent is required for these early retirements.

This is inevitably quite a large cost to the scheme. We have recently had an actuarial valuation and the sponsoring employer wants the trustees to agree never to consent to these requests for early retirement on these terms, so that this cost may be omitted from the valuation. The trustees have never refused a request for early retirement in the past and indeed have formerly been directed by the sponsoring employer not to do so”.

Has this happened to other pension schemes? What did you do?

Encourage your fellow Member Nominated Trustees (or representatives) to Join the AMNT

Even in this social media world of Facebook, twitter and blogs, by far the best way to recruit someone is still by word of mouth, one to one. So if your fellow MNTs in your scheme are not yet members of the AMNT, please point out the benefits and ask them to join! Check out our revamped website here

Driving down investment charges

An AMNT member wants to do something about investment charges and to see whether we can't drive down charges - or at least reach acceptable standards - for our investments. The concept is that perhaps we may be able to guide members as to what a reasonable charge rate might be for certain asset class investments and not only that but perhaps have more confidence in using more challenging forms of contract - risk reward and so forth.

This is a big subject and it would be very helpful if we could identify a set of AMNT members willing to share some knowledge regarding their experiences on costs and contracts. If you are interested and can help please email mail@amnt.org

£179m of Equitable Life payments owed

The Equitable Life Payment Scheme is asking company pension fund trustees and administrators for their help to make payments of £179 million to their members. Members of the pension scheme that you act for may lose out if you do not take action. 547,000 scheme members are due a payment of 22.4% of their relative financial loss suffered as a result of UK Government maladministration in the regulation of Equitable Life.

As Equitable Life did not hold the addresses for nearly 500,000 company pension scheme members, the Scheme is asking trustees, administrators or authorised representatives of pension schemes that invested in Equitable Life between 1992 and 2000 to share their members’ addresses.

The Payment Scheme has made good progress with most company pension schemes and has received data sharing agreements covering over 400,000 of their members who are due payments of £115 million. This represents 73% of the 547,000 members who are due a payment.

The Payment Scheme is now urging the remaining company pension schemes to return data sharing agreements as soon as possible. Once this is completed, they can provide members’ addresses so the Payment Scheme can write directly to their members to start the payment process.

A list of the company pension schemes that the Payment Scheme has been unable to trace is on the Scheme’s website. Individual members of these schemes can call the Payment Scheme’s policy checker service on 0300 0200 150 to check whether their policies are eligible and find out the next steps to take.

Pension Trustees Circle Seminar

This will take place on Sunday-Monday 29-30 September at The Majestic Hotel, Harrogate. There are currently 2 Pension Trustees Circle (PTC) events in the South East – this will be the first meeting in Northern England. The PTC is for chairs of pension schemes or experienced trustees in pension funds with a minimum of £100m and it is free to attend. In addition, to celebrate the inaugural PTC North meeting and encourage attendance, the organisers are providing free accommodation for approved trustees. if you would like to apply for a place please contact Liz Doughty – liz@spsconferences.com

PMI Qualification in Trusteeship

The AMNT have been researching the possibility of organising training and the exam for the PMI certificate in trusteeship.

We would like to hear from any of our members that would be interested in the training and sitting the exam. If we have enough interest then we will explore setting up the training and the exam. To register your interest please email mail@amnt.org

Dates for the diary – Thursday 26^th September 2013!

Next AMNT open meeting scheduled to be held at Pensions Corporation, London on Thursday September 26th. Further details to follow. We are also planning an event to take place in the House of Commons in November.

Defined Benefit Defence Pack

The latest version of the pack is being updated and we hope to be able to announce a re-launch date soon. In the meanwhile if any AMNT members need advice or support on proposed closures please email DB Working Group Chair, John Gray, (in confidence) at mail@amnt.org

Finally....

Picture (bottom right) of our other Vice Chair of the AMNT, “Red” Barry Parr, on front cover of July 2013 “Pensions Insight” magazine (Shome mishtake, shurely? Ed)

Editor: AMNT Executive member John Gray

"Ambitious Enough? The future of workplace pensions"

On Tuesday morning there was a TUC seminar on workplace pensions Chaired by Assistant General Secretary, Kay Carberry. Keynote speaker was Minister for Pensions, Steve Webb MP.

In his speech he promoted his vision of "Defined Ambition" pensions.  He thinks that Defined Benefit (DB) schemes are finished outside the public sector but wants something better than Defined Contribution (DC). Problem with DB is cost to employer and volatility, while problem with DC is uncertainty and protection against inflation.  He wants something that is not as good as before (DB) but better than the minimum (DC).

He suggested that employers may pay an insurance company (as a company perk) to protect the value of a DC scheme so that on retirement you would get at least your contributions back. He also said that what employers want with pensions is a level playing field and they don't want to pay more than competitors.

My question to him was that are we just trying to reinvent the wheel? If workers need certainty and inflation protection then the answer can only be DB. A reformed DB, where you look for example at employer caps in contribution (I forgot to mention smoothing). In Japan nearly 100% of pension provision is still DB, while in South Korea which has amongst the worlds longest life expectancy they are still opening new DB schemes. If companies want a level playing field then introduce compulsion.

He replied that he did not know why DB was still so prevalent in Japan. He thought it may be related to inflation? He also said it would be inconceivable to get political consensus in the UK  to agree to DB pension compulsion in the UK.

Which I would agree with. It will be impossible to get consensus from right wing Tories. That is why the next Labour Government with a decent Parliamentary majority should just do it, because it is the right (or rather left)  thing to do.

You can check out my twitter comments on the rest of the seminar here 5 February 2013.  There were some really fascinating contributions from other panel members: Doug Taylor from "Which?"; Professor Orla Gough from Westminster Business School and Craig Berry from the TUC.

I had another chance at a question towards the end of the seminar, where I asked the panel that there is a lot of interest currently in "Predistribution" and the concept of a living wage, since the taxpayer should not be spending money subsiding bad employers who pay poverty wages. So should we in the pensions world be also talking about a "living pension" and not allowing bad employers who don't provide one to subsidised by taxpayers as well?

Not sure if I got a full response from Panel. Craig Betty was supportive but  DWP civil servant, Mike le Brun, who took Steve Webb's place on the panel said that individuals will have to take more responsibility for their own pensions. In DB they were passive but in DC they must be active.

Which would seem to contradict his Minister comments about the problem with DC being that individual workers cannot understand the uncertainty and the inflation risk.

If the best brains in the Treasury and the City of London cannot accurately predict return and risk then what chance does Joe Public have with their DC pensions?

Barnardo's Pension Betrayal

Some things do make you simply despair. Today I learnt that the Charity Barnardo's has announced that it will be closing its defined benefit pension scheme for it's staff without consultation.

Of course it is now back tracking rapidly since UNISON has reminded it that it is legally obliged to consult with its staff before making such a decision.

But how on earth have we come to this place that a previously respected national charity is not only depriving its staff of a decent pension scheme but is planning for them to retire and die in miserable poverty?

Let us get certain things straight from the beginning. Firstly, Barnardo's do not have to close their career average defined pension scheme. It will not get rid of any pension fund deficit since that will remain and now become far more expensive to service. It will arguably make the existing deficit worse and without doubt, cost Barnardo's more money to close it rather than keep it open.

So why on earth are they wasting charitable and public money on closing their scheme?

Not only that but even the Government has accepted that the way pensions schemes traditionally calculate the cost of their pensions is completely nonsense due to outdated and ridiculous accounting measures. The Pensions Minister, Steve Webb, has promised to change this and there is currently an on going enquiry into this matter which some commentators believe could reduce the size of pension fund deficits by 40%?

What is also particularly sickening is that Barnardo's is proposing to offer its staff being kicked out of its existing pension scheme, the poverty pension plan currently offered to new staff members. It will only offer 4% or 6% matched employer pension contributions, which are wholly inadequate and will mean that many of their staff, particularly the low paid will retire and die in poverty.

Is this what they really want? What does the Charities trustees think of this?

If you check the accounts there are 8,366 Barnardo staff who earn less than 59,999 per year. The overwhelming majority of course are on much less than £59k. There are 35 staff who earn £60k - 159k per year, who no doubt earn so much, they will be able to properly fund their pension schemes.

The top earners are the ones who made the decision to close the traditional scheme.

This is all just wrong and totally unnecessary. Barnardo's should be engaged in genuine and meaningful negotiations with UNISON over these issues.

If they don't then, it will just further damage and even help destroy their reputation.