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"

TUC Congress 2023: Day Three

 

Tuesday was a busy day for me. In the morning we had a great speech by guest speaker, the shadow Deputy Prime Minister (I love repeating this), Angela Rayner on Labour's "New Deal for Working People". 

During lunch I took part in a fringe panel debate on "Collective Defined Contribution" (CDC) pensions sponsored by First Actuarial, Hilary Salt as Chair. This was well attended and there was a thoughtful debate with lots of audience participation. I will post further on this, since CDC could be incredibly important to future pension provision in this country. 

There was a sober but at times passionate address by Lynn Sudbury-Riley on behalf of "Covid Bereaved Families" during the debate on the ongoing Covid-19 public enquiry. 

Since my mother died this year after being tested positive with Covid it was important to for me to listen. (but to be clear that the death certificate did not mention it even though she died of a respiratory condition but again, she had been unwell for a long time)

In the afternoon I spoke on behalf of UNISON in the affordable Housing key worker debate. I will post the speech later. People said it went well but I did mess up the timings a little bit. Hat tip the UNISON self confessed "nerd" who was at home working but still listening to the TUC live stream and sent me the picture top left. 

Later on there was a dignified and important debate on a composite calling for solidarity with Ukraine. One affiliated union spoke against this motion since it called for military equipment to be supplied to Ukraine but every other union who spoke was firmly in favour and the motion was carried overwhelmingly. Outgoing PCS General Secretary, Mark Serwotka, gave an amazing and powerful speech in favour. What a swan song Mark. 

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

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".

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. 

TUC Pension Trustee 12: "Tools For Challenging Scheme Closures"

After the opening speeches at last weeks TUC Pension Trustee Conference 2012, I went to the "Tools for Challenging Scheme Closures" workshop led by Hilary Salt from First Actuarial & Neil Walsh, Pensions officer at Prospect.

This workshop, is of course, right up my street. Decent defined benefit schemes are being closed down completely unnecessarily and being replaced usually with third rate, inadequate alternatives which will result in employees being dependant on the state when they retire and then dying in poverty.

The first tool they described is a "tape measure". How you measure your pension liabilities? At the moment the tape measure used (the yield in Government loans called gilts) is broken. Due to Quantitative easing and the so called "flight to quality" from the weaker Eurozone countries, gilt yields in the UK are not only historically low but even negative. Pension liabilities may have increased during the last 12 months but nothing has really really changed. It is the broken tape measure.

There are a number of things should be considered long before closure :- tiered contribution levels, changes in retirement age, CARE (career average) rather than Final Salary, reducing  accruals, longevity adjustments, caps on salary, inflation measure, contract back into SSP, Cash balance schemes, hybrid DB/DC etc.

Trustees should also consider the "Sledgehammer" approach of winding up schemes if closed.

All schemes are different and trustees must refer to the trust rules and make sure they get truly independent advice. If contributions have to go up then time with any pay rises and consider salary sacrifice.

CARE schemes are not only fairer but if risk is the real driver for the employer to close the scheme rather than cost then they will reduce salary risk. Consider risk sharing such as contribution caps.

In the Q&A I asked about the argument that closing schemes did not get rid of the deficit and that they can make things worse. Hilary said that this can be true and that a closed defined benefit scheme can be as inefficient as defined contribution schemes. They become like annuities invested solely in gilts and cash.

Hilary has recently written an excellent booklet for the TUC on "The Future of Defined Benefit Schemes" here.

While the Association of Member Nominated Trustees (AMNT) will be producing their own guide on what to do if your employer tries to close your scheme on December 11 at our AGM. 

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.