TUC 23 Collective Defined Contributions (CDC) Pensions fringe – What are CDC pensions and how will they improve people’s lives?

Better late than never. This is my contribution to the panel fringe on Collective Defined Contribution (CDC) pensions. Many thanks to Hilary from First Actuarial for organising and chairing. Also to Andy and Derek for their excellent contributions. It was the best attended pension fringe that I have attended in a while and lots of great questions and challenges.  Previous panel speakers how explained how CDC works so I concentrated more on the trade union angle. 

"I am a UNISON delegate at Congress but here today as a trade union pension activist, appointed as a employee LGPS Pension board member and who also represents local government unions on a LGPS collective investment pool. I also wear other pension hats.

To be very clear I do not think that CDC is something to be preferred above Defined Benefit (DB) schemes but there are many sectors and workers in this country who have never had the opportunity to DB and are now in dreadful Defined Contribution (DC) provision.

As a relatively young person, I became interested in work related pension provision for 2 main reasons. First, was when my father confided in me that me, he had discovered, far too late to do much about it, that the State Pension would not provide enough money for him to properly retire. He was not  unintelligent or uninformed, but he had just assumed that the state pension and a collection of small pension pots he had accumulated over the years would provide him with enough cash to retire, not in luxury but in dignity. He had worked since he was 15 and for many years was a skilled manual worker.

This lack of money meant he had to work part-time for the rest of his life. Not through choice, but to pay the bills.

The 2nd reason was when I started working as a Council housing management officer in the East End of London in the early 1990s. While there was and still is, widespread poverty in this area, it was the poverty of so many older residents, which struck me the most.

So many of them lived hand to mouth, with no holidays, basic furniture, cold homes and little or no money for presents fort their  grandchildren. I used to get into work early and would see every Monday morning, pensioners queuing patiently outside the Roman Road Post Office to pick up their pensions, hours before it opened. Rain or shine. Obviously, they had run out of money, hopefully only the Sunday before. Yet the vast majority of them had worked hard all their lives.

Now a lot has changed since then regarding pensions, some good, some bad, some ok

The Labour introduction of Pension credit was transformational. State pension provision is much better and auto enrolment (AE) , while imperfect, is a welcome addition to workplace pensions.

But we have pretty much lost the battle for defined benefit schemes in the private sector while the public sector DB seems to be in a far more healthier position. But decent DB provision in the UK was always a minority sport. I represent 80,000 UNISON members on its NEC, who work for housing associations or charities throughout the UK and Northern Ireland.

Occupational pension provision in the sector is at best hit and miss but pretty rubbish in parts particular in the care sector, where many employers only pay the AE 3% of salaries.

Defined contributions (DC) schemes, and to be frank, pensions in general, confuse workers. They are thought to be expensive, complex, fragmented, volatile and risky. This is true.

• DC schemes do not deliver a pension; they are small investment pots for each member.
• All of the asset management fees and transactions are extracted from their investment pot.
• All the risk of the market value of assets falling is with the member.

CDC may well appeal to employers who want to offer good pensions to their workforce where they have previously closed their DB scheme. The prospect of a regular and relatively reliable income in retirement will be welcomed by UNISON members who are now in a DC scheme.

DC Pension pots are still small, charges relatively high, and there is a general lack of trust in personal financial services.

So, what is the alternative and why CDC?

Many years ago, I remember visiting Netherlands with UNISON and being impressed talking to Dutch trade unionists about their CDC schemes.  CDC is also found in many other countries.

They were very proud to their scheme and while being prepared to be ruthless in protecting it, believe that it has delivered for their members. Due to scale, they believe it cuts costs, improves investment performance, and manages volatility. They also believe that there was improved governance, in particular for Labour rights.

As trade unionists we should believe that as a rule, "Collective action rather than individual is best".  

One more important reason for trade unionists to consider CDC is that it is an opportunity for unions to involved actively in the design and operation of these schemes. To be frank, there are many other countries where trade union density and influence is greater than in ours. Trade unions in these countries tend to provide more services than we do in the UK.

I think there is a connection and believe that CDC is an opportunity to provide better pensions, make trade unions even more relevant to members and a potential recruitment prospect"

COLLECTIVE PENSIONS: IMPROVING INCOME AFTER WORK - TUC Fringe 23

 

Next tuesday 12 September 2023 at 12.45 - 2pm I will be a panel speaker at a TUC fringe at Congress in Liverpool sponsored by First Actuarial LLP. 

I am at TUC as a UNISON NEC delegate but will be speaking at this fringe as a trade union pension activist/LGPS Board member etc. 

Check out some of my previous posts on Collective Defined Contribution schemes (CDC)

https://www.johnslabourblog.org/2022/01/royal-mail-cdc-pensions-could.html

https://www.johnslabourblog.org/2019/06/going-dutch-collective-defined.html

https://www.johnslabourblog.org/2023/03/tuc-pensions-conference-2023-pensions.html

"Many members of trade unions no longer have access to good quality defined benefit pensions. Instead they are auto-enrolled into individual defined contribution schemes often with very low employer contributions which are unlikely to provide dignity in retirement. Legislation now allows a new type of scheme: collective defined contribution. These schemes have the potential to really improve the income workers receive in retirement. This session will look at how these schemes work, where they might be appropriate and how trade unions can get them onto their bargaining agenda.

Speakers: Andy O’Regan, Employers & Strategic Partnerships Director (TPT), John Gray, Derek Benstead – First Actuarial LLP

Chair: Hilary Salt – First Actuarial LLP

Refreshments provided

Venue: Room 13

(check out al l TUC fringes and agendas here https://mailchi.mp/2c9743ce8691/welcome-to-tuc-congress-2022-final-agenda-436884?e=ca2047d5d4

Unions 21: “Building Tomorrow’s Pension”

Still catching up on posting things. This well attended event was held on March 3rd in Portcullis House, House of Commons to launch a new Unions 21 publication called “Tomorrow Pensions”. Lynne Jones MP was Chair (middle). Unions 21 Chair Sue Ferns opened meeting by reminding us that unions are still most trusted by ordinary workers with regard to pensions ahead of employer and government. This is across the board. Even 45% of non-union members trust unions to look after pension interests.

First speaker was Paul Moloney (left) Nautilus assistant General Secretary. This union has merged with the Dutch and organises Merchant marine officers. His contribution was entitled “Engaged Investment: is there power in the union?”. Paul set the agenda that current pension policy was failing and we have the spectacle that the major economies of the world are not putting enough money aside to support decent pensions for its workers. He would like to see a co-ordinated response by pension fund trustees to force up safety and other standards in the maritime industry. This is not only good for the maritime unions but also for the pension funds since he argues that “without fail” investment in industries with good safety records produces long term sustainable investment returns.

Derek Benstead (First Actuarial) was next and he talked about “Pension design: is it time to think outside of the box?”

He pointed out that we will never do away with risk. Current 20 years old will probably draw pensions until they are 90. They will live through a number of recessions. Pension schemes which are too rigid will break. His solution is to share risk between state, employers and employees. In his view the Pension Protection Fund is the biggest and best thing to happen in pensions. Defined benefit is just too expensive and “risky” for employers. While the risk for employees with money purchase scheme is that if you are on £30k per year and trying to get £10k per year pension you may end up with £5k or £15k.

His solution is a hybrid pension, Defined contribution for members and 1/120th defined benefit for employers. There should be no refunds back to employers for any pension surplus. Schemes should be career average. He believes that it is important that there should only be discretional annual benefits increases only. He thinks that a major reason for the demise of pension schemes is the law now requires pensions to be increased by up to 2.5. % per year. He thinks this is too expensive and that they should be allowed to go down as well. Need more flexibility. Derek played the role of “Mr Bad Guy” with most of the audience.

David Pitt-Watson (right) was last with “Why a collective approach in investment could be the key to solving the pension’s crisis”. See Union 21 video

David started off as someone who is a City worker by apologising for the complete mess the “City” had made of things recently. He has been doing a lot of research in recent years on Pension structures and costs of investment with Matthew Taylor and the RSA. Including “Citizen Juries" (I was a “witness” to one of these Juries). Defined Contribution (aka money purchase) Pension policy holders typically pay a fee of 1.5% pa. This works out over the lifetime of a policy as 38% of your money goes in fees and you get only 62%. In good Defined Benefit (aka as final salary) schemes it only cost 10% in fees so you get 90% back. If at age 25 you invested £10,000 in a DC single pension premium it will generate £94,000 of fees!

Annuities are also very expensive. The issue is not so much Defined Benefit (DB) v Defined Contribution (DC)? Rather large collective pension schemes v small ones. For example women teachers in a USA scheme who aimed to retire on $2k per month. If a collective “pension pot” rather than annuity provided this money. It would cost a teacher 12.5% of her salary collectively. It would cost 23% salary if done individually. So “by design” pensions could be 83% higher. David admitted he’s been startled over some of the stuff he has read over last 18 months on this subject.

There was a useful Q&A. The risk of large collective DC schemes just ending up as modern day Equitable Life. My question is since the “problem” with DB schemes in increased life expectancy why are DB schemes now “unsustainable” despite many schemes putting back retirement ages? The consensus answer was that DB schemes are still sustainable if more money is paid into them or benefits reduced (or both).

One Unite member of the audience (Peter Sykes?) pointed out that when he hears the term “flexibility” he has to reach for his wallet.

Actuary Hilary Salt asked why did employers introduce DB schemes in the first place? It was to recruit and retain quality staff. This need still remains. There is a new "off balance" risk to companies. Since many employees will be too poor to retire and age discrimination will mean you can’t sack them. Companies will have to pay them off in the future.

Naomi Cooke from GMB pointed out the risk on state from inadequate pensions. Otherwise the low paid and those without decent pensions will have to reply on state benefits. We need to inflation proof pensions or the tax payer will have to pick up the cost. Have to design pensions around what society wants to produce.

Richard Balfe, the Tory advisor on trade unions to Cameron was also there and he actually spoke strongly in favour of public sector defined benefit pensions (shock horror) as not being “gold plated”.

Another person reminded everyone that DB still flourishes in the UK - but only in the board rooms of highly paid top 100 company directors!

A former TUC pensions officer pointed out in 1979 had the Tories not been elected we were on course to have a basic pension of 25% average earning and another 25%% from SERPS. So the average earner could have retired with 50% of earning.

Lets hope that 2010 does not turn out to be another 1979 of lost opportunities for social progress!

Update: I forgot to mention that Alan MacDougall from PIRC had also written a chapter in the report called "Responsible Investment: An Essential Trade Union Tool" but he was unable to attend.