Twelve years ago my old boss penned a column in an IFA trade newspaper headlined: “Is Steve Webb p***ing in the wind on defined ambition?”
So much has changed in the intervening years. Webb is now of course Sir Steve, while my old news editor Tom Selby (for it was he) is now director of public policy at AJ Bell. I know, I can’t believe it either.
What hasn’t changed is politicians’ obsession with making defined ambition, now morphed into “collective defined contribution”, work when there is very little evidence or rationale that anyone who hasn’t got a ginormous vested interest actually wants it.
Torsten Bell, pensions minister and former boss of the Resolution Foundation think-tank, likes to trumpet the success of the Royal Mail pension fund – to date, the only employer in this country to have rolled out a CDC scheme to its staff.
Denmark and Canada were also mentioned for their use of CDC. But there was no mention of what’s going on in the Netherlands – whose pension provision has been the envy of the Western world for decades but where they are now moving away from CDC, and towards straightforward defined contribution plans.
Back in 2013, the “third way” or middle ground between defined benefit and defined contribution schemes was being sold by its advocates as a way for employers with legacy DB schemes (like the Royal Mail) not to chuck in the towel entirely.
‘Sick and tired of providing widows’ pensions and forking out millions every time inflation jumps? Why not try brand new CDC?! At a fraction of the cost of your tired old final salary scheme, your finance director will LOVE it. Your staff won’t understand it, but they’ll think it’s better than that bog standard DC pension everyone else has!’
Today, of course, there are virtually no private sector DB schemes still open. Accordingly, the message has changed.
Last month, the Department for Work and Pensions confirmed it was laying new regulations to allow multiple employers to join the same CDC scheme citing, quite correctly, that most people want a guaranteed income in retirement. Mr Bell is right – for most people, managing a drawdown investment portfolio into retirement is not going to be the right option.
The DWP also made the eyebrow-raising claim that CDC schemes “could boost retirement incomes by up to 60pc while providing more security”. Presumably this modelling has been cooked up based on other areas of reform the Treasury is keen on that would result in billions more pension savings going into infrastructure and private assets that it also says would boost returns.
In the summer the Government claimed its reforms would grow the average earner’s pension by £29,000. It estimated this frankly stonking return by “assuming greater investment through addressing underperformance and increasing diversification, reducing costs which could be passed onto savers and by investing for longer, ensuring worker’s pension pots work harder, for longer.” Similarly, I’m afraid I put this new 60pc claim in the same pile as the £29,000 promise: not to be trusted.
If you’re reading this Mr Bell – or indeed Sir Steve – don’t take these criticisms the wrong way. We do need to keep improving Britain’s pension system. Almost everyone agrees pension contributions have to rise dramatically (whether that is best met through compulsion is up for debate). Indeed, the CDC poster
child Royal Mail scheme has 13.5 per cent employer contributions.
The industry understands that the fabled pensions dashboard will be a game-changer and should, if not blighted by IT problems, dramatically boost engagement.
Defined ambition or CDC are not the priority at this moment. I can see the intellectual appeal, Bell and Webb are both brain boxes who want to fix problems, but I’m not convinced any private sector company would be interested.
As John Ralfe recently wrote, if CDC schemes are so good then why doesn’t the Government move the pensions of MPs, teachers, doctors, and all the other public servants into them? What better way to put your money where your mouth is.
I wouldn’t be so uncouth as to suggest the pensions minister is p***ing in the wind with his plans for CDC – but I don’t disagree with the sentiment.