What is CDC? (and will it be contagious?)

Apologies for the tabloid style headline, but in the Queen's speech yesterday, she announced that the Government is looking to introduce Dutch style "Collective Defined Contribution" pensions (or CDC).

For the 99% of the population who don't have a clue about CDC (or pensions generally) please click on this link to a post by Nigel Stanley, in the TUC Touchstone site "What are CDC Pensions and why are they a good thing". 

For another alternative view see Michael Johnson's post for the Centre for Policy Studies called "Collective DC: the least worse option". 

Hat tip picture "Starry Night" by Vincent Van Gogh.

Budget & Pensions - throwing out the baby with the bath water?

"Answered prayers cause more tears than those that remain unanswered".

Don't get me wrong I have blogged recently here and here about how poor value pension annuities are for many people.

Yet instead of reforming annuities and making them better the government will now allow people to just cash in all their pension pots when they retire and spend it as they like.

Now this may be clever politics but it will be potentially disastrous for many working people and for all taxpayers.

For generations there has been a trade off where a pension saver gets in return for life long generous tax relief (and for higher rate taxpayers - very generous relief)  an obligation to spend 75% of this money to buy a guaranteed life long income called an annuity.  The "deal" is that tax relief is justified because the money will stop people being dependent on the taxpayer when they retire. As Nigel Stanley from the TUC argues here this break in the trade off will also mean that the principle of pension tax relief itself will be under threat.

The very wealthy will use this huge concession to rip off the tax payer which will also bring tax relief for pensions into even further disrepute. 

I actually agree that most people will not "squander" their pensions savings when they retire but to be clear this will happen. In a small minority of cases people will indeed fritter the money away but in other cases they will be robbed and deceived by the ever present financial services sharks and charlatans, who will no doubt be now rubbing their hands in glee at the prospect.

The government claims that it doesn't matter if people squander their private pension since they will have the new State Pension of £150 per week to fall back on? As I have pointed out in the past it costs £150 per week just to rent a one bedroom flat above a Chicken shop in Newham. If you privately rent (which is a growing sector ) then you will have indeed an incentive to blow your pension money on "holidays of a lifetime" and then expect the taxpayer to pay your rent. You would in fact be a fool not to do this.

But the very worse thing about this budget proposal is that instead of reforming the broken annuity market it will mean that annuities remain discredited.  People will also be so fearful of running out of money when they grow old that they will keep the money in the building society on deposit and live miserable lives dependent on tiny amounts of interest while inflation cuts the value of their lump sum, year in and year out.

By coincidence I was at the "Rethinking Pensions" conference the day after last weeks budget. This was of course a live issue and I will post further on the 1st day of the conference.

Hat tip picture Nigel Stanley clever response to the stupid and condescending Tory Party Chairman Grant Shapps.

Another day, another reason why the ABI is a self serving cartel ripping off UK pensioners

Check out Con Keating's brilliant rebuttal on Henry Tapper's blog of the latest attempt by the greedy cartel also known as the Association of British Insurers (ABI) to justify the ripping off of British pensioners.

I am amazed that otherwise decent and respectable insurance companies soil their reputation in this way. Their lust for excess profits from their rip off charges in the DC pension business mean they defend the indefensible and attack new better value ideas such as "Collective Defined Contributions schemes".

You are forced to conclude that the senior managers of insurance companies are far more concerned with their inflated pay and bonuses than the interests of their poor (in the true sense of the word) policy holders. 

Personally, I hope a future Labour Government will break up this cartel and separate the insurance and pension industries. There are clear conflicts of interest.

Hat tip Newham's own Nigel Stanley at TUC Touchstone

"Where next for Pension Policy?" TUC GS Frances O'Grady & Minister Steve Webb

TUC National Officer (and NEST trustee) Nigel Stanley opened the meeting.

The new TUC General Secretary, Frances O'Grady spoke first. She told us that this generation will be the first to be poorer than their parents. Things are very tough and while there is some genuine good news on auto enrolment (AE) and the state pension. We need to change the failed "market approach" economy of the last 3 decades.

While the TUC supports the general direction of travel, the starting point should be the overwhelming case for an increase in higher AE pension contributions.  We need a cap on Defined Contributions (DC) charges of 0.7% pa,  trust based governance and we must tackle systemic pension inequality. Why are top company directors paid 23% of income into their DC pensions while their workers only get 6.6%? This is profoundly wrong. Why are so many low paid workers excluded from AE?

We need employee representation on company remuneration committees to bring about some common sense on these boards.

Finally, why do higher rate tax payers take such a disproportionate amount of relief compared to basic taxpayers. Is this fair? 

Next was key note speaker, Pension Minister, Steve Webb MP.

Steve welcomed the broad support of the TUC on many of his measures. He is very proud that 2 million workers have been auto enrolled into their pensions schemes with scarcely any controversy.

He is concerned that many low paid workers are excluded but he doesn't think it is worth them paying 10p per week into a pension. It's not that they "don't give a damn" about the low paid and women.

Steve attacked the media for their coverage of his Defined Ambition (DA) and Collective Defined Contributions (CDC) proposals. The Telegraph accused him of "stealing" the indexation of pensions. He could have done nothing about Defined Benefit pensions and just watch them die. How can conditionality of benefits be worse than having no indexation at all? At the moment with DC all the risk is on the employee. What is wrong with risk sharing?

The DC collective model is illegal in British Law. Why can't we look at the Danish model where each year some of your pension is guaranteed? While guarantees have costs they are attractive to some.

He is consulting on charges and realises that he has to protect the majority who have been auto-enrolled that have never made an active choice on their funds.

He pointed out that despite the huge rise in life expectancy, the male  state retirement age is the same as a century ago. This is just unsustainable.

My question to Steve was what advise should we be giving low paid workers who when they retire depend on private renting. Many UNISON members are low paid and more of them rent in the private sector than from social landlords. I met recently a pensioner who is totally dependent on pension credit who has to pay £150 per week for a bedsit above a Chicken shop in West Ham. This man had been on low wages all his life but if he was in a pension scheme he would have had to save at least £100,000 lump sum just to get an annuity to pay off his rent.

What this means is that under AE the low paid who have to privately rent may be paying into a scheme that they will never benefit from? This is a future mis-selling scandal. What we need to do is of course increase real pay and reduce rents but... in the meanwhile?

Steve accepted that this is a problem and the decline in owner occupation has increased pensioner poverty but thinks that the housing benefit taper will still make it better for low paid workers to pay into AE, since the employer matches contributions pound for pound.

(after this we had coffee and then workshops. I will post next on the "Stewardship - taking action" workshop)

"Going Dutch – how to double the value of British pensions"

Hat tip Touchstone by TUC Nigel Stanley "Earlier today I spoke at the launch of  Going Dutch – how to double the value of British pensions.  This is a new report by David Pitt-Watson for the RSA that argues that the UK’s DC pensions could deliver much better pensions for the same contributions.
It’s an exemplary report - succint, well-written and carefully argued. I would urge anyone with a passing interest in pensions policy to read it.
The report argues that the DC schemes in which most people with pensions now save are extremely inefficient. There are two main areas of potential gain.

• Making schemes much bigger and ensuring that they are run by trustees in the interests of their members can deliver one lot of savings. Charges dramatically eat up investment gains – up to 40 per cent of potential pension – and if you can reduce charges through efficient management and economies of scale then you can deliver seriously better pensions for the same contributions.
• Making DC schemes collective so that members pool their resources and share risk can deliver a further increase in benefits. This would mean schemes provising their own pensions rather than compelling people to buy annuities....."