https://www.ft.com/content/0727a764-493 ... 5ddcca99b3Royal Mail plans to offer 140,000 workers a Canadian-style scheme to share risk
“When I was employed I was told I was going to be paid in two ways; you will get a salary and then you will get a steady pension once you retire,” said Bob Farmer, a 67-year-old pensioner in Canada. “But in these target benefit pension schemes, you never know quite for sure what your pension is going to be going forward.”
Mr Farmer, a former worker with Bell Canada, is one of a number of retired Canadians disgruntled over sweeping changes that mean they no longer get the guaranteed company pension they were promised. Instead their pensions have become a “target”, where retirement income can be cut in extreme circumstances.
These “target benefit” plans — which also exist in the Netherlands and are known in the UK as collective defined contribution (CDC) schemes — are now being considered for UK workers. The government is examining regulatory changes to enable collective risk sharing schemes to be offered to more than 100,000 British postal workers by as early as 2020.
The push for CDCs is being driven by the desire of unions and some employers to offer workers an alternative to “defined contribution”, or DC, plans, which load all of the risk of building and delivering pensions on to individuals. Many pensions experts believe the CDC schemes offer employees a more secure option.
More than 10m UK workers have been enrolled in DC plans since 2012, when employers were required to enrol staff in a workplace pension. Most opted for DC schemes, hastening a decline in the number of traditional defined benefit plans in the private sector.
DB schemes are considered “Rolls-Royce” pensions because the employer bears all the risk for paying members and surviving spouses an indexed retirement income for life. Only about 500 — or 10 per cent — of DB schemes remain open to new members as employers trying to limit costs have tipped more workers into less costly, but riskier DC schemes.
Advocates of CDC schemes say they offer employers and workers a third option. Members pool their contributions into a fund that pays an income when they retire. The employer also contributes, but is not on the hook for any shortfall in the fund.
Instead of a guaranteed pension, members are given a “target” income by the scheme. This is a step down from a DB pension promise but is seen as a step up from a “pure” DC plan, which provides no income certainty and leaves individuals to make difficult retirement income decisions.
“Savers and employers are caught between a rock and a hard place at the moment,” said Kevin Wesbroom, a senior partner with Aon, a pension consultancy and a proponent of CDC.
“CDC can create a new middle ground for employers to offer a good old-fashioned retirement income scheme without taking on balance sheet risk,” he added.
A number of studies have suggested CDC schemes could produce at least a third more income than an individual DC, due to the collective investment approach and cost efficiencies of pooling funds.
“What ordinary working people are looking for, what they want that they cannot get at the moment if they are in a DC system, is to get a pension that they can rely on and that they know roughly the kind of area [of investment] they are looking at,” Janice Turner, co-chair of the Association of Member Nominated Trustees told a recent parliamentary inquiry. “They do not want to have to make difficult decisions.”
The introduction of CDC pensions in the UK has been boosted by the Royal Mail Group which, in concert with the Communication Workers Union, is pushing to offer the schemes to its 140,000 workers, who were recently taken out of their DB scheme into a riskier DC plan.
“Royal Mail and the CWU have committed in principle to the future introduction of a CDC scheme for all Royal Mail employees,” the Royal Mail said.
But while some see CDC as a viable alternative for pension holders, others are more cautious about its benefits.
A key concern is intergenerational fairness. In the other countries with CDC schemes, if the plan’s investments underperform, younger members can be asked to pay higher contributions to protect the benefits of existing retirees. Pensioners in some countries have had pensions frozen or, in the Netherlands, even cut by as much as 6 per cent.
“CDC can only work in the UK if it is strictly regulated,” said John Ralfe, an independent pensions expert. “Without this strict regulation we are just wilfully creating a huge mis-selling scandal for the next generation,” he warned.
Other are concerned that CDC plans are too similar to with-profits funds — in which individual investors’ money is pooled together — which have been widely criticised for their opaque policyholder bonus decisions.
“If it is to be successful it will be important to learn the lessons of what went wrong there (with-profits),” said Tom McPhail, head of policy with Hargreaves Lansdown, the investment managers.
David Brooks, technical director with Broadstone, the pension consultants, pointed out that employers may also find themselves heading into tricky waters if unpopular decisions — such as reducing payments to pensioners, need to be made.
“There is reputational risk for sponsors for cutting pensions in payment,” said Mr Brooks.
Proponents of CDC say the UK can learn lessons from abroad.
“In the UK, we would be introducing CDC [plans] with a clean sheet, so we don’t need to copy undesirable features of the Dutch and Canadian systems,” said Derek Benstead, senior consultant with First Actuarial, an actuarial consultancy that is working to introduce CDC schemes to the UK.
Aon’s Mr Wesbroom predicted that CDC schemes in the UK would also be fully transparent and open to those who want to scrutinise investment decisions. “This will not be like with-profits,” he said.
He added that any DB pension rights that had already been accrued by pension members would be protected, and not converted to “target income” — which generated controversy in some Canadian provinces.
The government has said it is continuing to work with stakeholders on proposals to enable CDC, but also says employers are not queueing at its door to push for the schemes.
“We welcome the ongoing communications and continue to work with stakeholders on the proposals put forward,” the Department for Work and Pensions said. “While we look at options, it is not right to advise on timescale, delivery or feasibility.”