CDC for Royal Mail -"risky and unnecessary" - Michael Johnson

02 Jun 2018, 12:15 ... l-johnson/

Unfortunately couldn't format this correctly so anyone interested in an indepth look at the original article should use the link above.

What’s below is a letter written by Michael Johnson which I have tried to publish in full (as far as possible retaining formatting).

I don’t agree with Michael’s conclusions and can see clearly where my thinking diverts from his (on some points I think he is wrong- on some we are philosophically at odds).

But I think this is the first proper challenge to the Royal Mail’s proposals for a “Wage for Life” scheme and it needs to be published , read and enjoyed.

As I have written to Michael, the best time for these comments was a few weeks back, when the Work and Pensions Select Committee was gathering evidence and before the DWP embarked on their current endeavours.

However, this is still timely, it will re-focus legislative attention to the risks which Michael identifies.

30 May 2018 Michael Johnson

Rt Hon Frank Field MP

Work and Pensions Committee

c/o Clerk of the Work and Pensions Committee

House of Commons

7 Millbank, London SW1P 3JA

Dear Frank and colleagues

Re: Collective Defined Contribution (CDC): for Royal Mail, risky and unnecessary

Given your past interest in CDC schemes, please find outlined below a dispassionate assessment of them, set against the background of Royal Mail’s commitment to delivering such a scheme to its workforce.

This letter considers Royal Mail’s commitment to deliver a CDC pension scheme to its workforce. It identifies a number of significant risks in what is a wholly unnecessary adventure, which the company’s shareholders have yet to fully appreciate. Indeed, Royal Mail does not need to establish any form of new retirement saving scheme dedicated solely to its own workforce.

With-profits funds
The attributes of a CDC scheme, notably the collective pooling of investment and longevity risks, could be provided by transparent with-profits funds (perhaps rebranded); they share similar performance drivers. These could receive contributions from both the employee and employer but would not offer any guarantees: CDC’s “target” language could be used throughout accumulation. The funds would have to be unambiguously deemed as “money purchase” funds (i.e. DC) from legal and regulatory perspectives and, ideally, incorporate pension funds’ regulated consumer protections.

Defaults to the fore
During the period of accumulation, employees’ individual DC pots should be invested in low cost, diversified, default funds, providing economies of scale. From private pension age, employees and retirees should then be defaulted into, say, 15 (or 20) years of income drawdown, while remaining invested in low cost default funds.1

1 This is “auto-protection”, detailed by the author in 2017, and subsequently (March 2018) recommended to the Government by the Work and Pensions Committee. 2

Later on in retirement, longevity risk should be pooled by default, in the form of a lifetime annuity, commencing at the age of 75 (or 80). Consequently, the collective aspect of the package would increase in later life. The choice to opt out would be available at each stage.

Such as approach would combine the benefits of collectivisation with the individualism necessary to make full use of pensions’ freedom and choice. Unlike a CDC scheme, these proposals could be accommodated within today’s legislative framework.

NEST as provider
NEST, with over six million members, has systems that are well accustomed to handling large numbers of individuals. Common sense suggests that NEST could be the host of the employees’ individual DC pots and, potentially, the manager of the with-profits funds. Alternatively, NEST’s existing (default) Retirement Date Funds could be used for the asset accumulation phase.

Barring NEST as fund manager, the with-profits funds should be overseen by a professional, independent governance body. Its principal role should be to preserve scheme sustainability, closely allied to maintaining intergenerational fairness by guarding against over-promising to older employees, and over-distributing to retirees.

CDC in the UK: some of the risks
Risk #1: a leap into the unknown. Royal Mail has committed to deliver a pension scheme that is untried and untested in the UK. Royal Mail would appear to have burnt its bridges, there being no apparent Plan B.

Risk #2: lack of client ownership of the CDC agenda: is Royal Mail, as client, the driver or the passenger in what may be an undeliverable adventure? The case for CDC may not be being driven primarily by its performance merits. This is not a sound basis for the formation of innovative pensions policy.

Risk #3: legal risk. Given CDC schemes’ lack of legal definition, there remains the potential (depending upon any scheme’s final design) for some balance sheet exposure, perhaps arising through “legal creep”.

Risk #4: a regulatory No Man’s Land. There is no regulatory framework in place for CDC schemes, heightening the risk of stakeholder misunderstandings.

Risk #5: reputational risk. Employers would invariably be attaching their reputations to the wellbeing of any CDC scheme that they may sponsor.

Risk #6: irreversible inter-generational injustice through excessive liquidation of communal assets (“over-distribution”) to pay today’s pensioners at the expense of current and future employees. 3

Risk #1: a leap into the unknown. Royal Mail has committed to deliver a pension scheme that is untried and untested in the UK. Royal Mail would appear to have burnt its bridges, there being no apparent Plan B.

Risk #7: unconfirmed tax and accounting frameworks. Any potential CDC scheme sponsor would be ill-advised to launch such a scheme without absolute clarity as to its tax treatment, both for itself and also the membership. The accounting treatment is similarly unspecified.

Risk #8: incompatibility with pensions freedoms. CDC’s inflexibility in accommodating the individual can only be overcome at the price of additional cost and complexity.

Risk #9: modelling risk. CDC proponents point to superior returns relative to DC pots, but these are modelled, not founded upon empirical evidence, underpinned by assumptions (a “mature”, stable and fully funded scheme from inception) that are wholly inappropriate to Royal Mail’s particular circumstance.

Risk #10: employer / employee miscommunication. It is unclear to what extent there is a gap between the CDC pension scheme that Royal Mail is offering and what its workforce thinks it voted for. Is there a risk of inadvertent mis-selling?

1. Background: Royal Mail
1.1 A high risk strategy

In 2012, prior to Royal Mail’s stock market listing, the then Government cleared the deck by assuming the Royal Mail Pension Plan’s (RMPP) £10 billion defined benefit (DB) funding deficit, along with £25 billion of assets. Some £35 billion of liabilities were transferred to a new taxpayer-sponsored Royal Mail Statutory Pension Scheme; these have subsequently mushroomed to £46.8 billion (March 2017). Benefit payments of more than £1.3 billion per year are now being met on a pay-as-you-go basis, in common with some 85% of public service pensions.

The residual RMPP subsequently accumulated new liabilities in respect of post-2012 accruals, and what was an initial surplus rapidly headed towards a deficit, albeit that the RMPP had closed to new employees in 2008. With the RMPP clearly unsustainable, Royal Mail proposed a new pensions, pay and working conditions package which, in March 2018, was strongly supported (91%) by members of the Communication Workers Union (CWU). The package includes a commitment to replace the RMPP with a collective defined contribution (CDC) pension scheme.

Royal Mail wasted no time in closing the RMPP to future DB accruals (end-March 2018) and establishing an interim arrangement consisting of a cash balance scheme, with a 13.6% employer contribution, and an improved defined contribution (DC) plan. Ongoing employer contributions exceed £400 million per annum.

One has to ask why did Royal Mail need to volunteer itself to be the UK’s CDC guinea pig?

Risk #2: lack of client ownership of the CDC agenda: is Royal Mail, as client, the driver or the passenger in what may be an undeliverable adventure? The case for CDC may not be being driven primarily by its performance merits. This is not a sound basis for the formation of innovative pensions policy.

1.2 Misaligned interests

A small cabal of pensions industry self-interests (predominately consultants and lawyers, perhaps seeking to replace their diminishing DB income streams) has been banging the CDC drum for some time. Without a client cause, success has eluded them: there is next to no demand from corporate sponsors, not least because having transitioned from providing DB to pure DC pensions, employers have no intention of reassuming any pensions-related risks, however remote.

However, Royal Mail’s travails have provided CDC lobbyists with an opportunity to leverage their cause by attaching it to help settle what is ultimately a labour dispute, one that is tinged with political overtones given Royal Mail’s former state ownership. Consequently it is ambiguous as to what extent Royal Mail as client owns the CDC agenda when, ordinarily, successful product innovation is customer-driven.

2. What is “CDC”?
2.1 As vague as “defined ambition”

The term “CDC” is, by itself, pretty meaningless. The Pension Schemes Act 2015 created three distinct categories of pension scheme:

(i) defined benefits, there being a full pensions promise in relation to the retirement income and any other retirement benefits that may be provided to members;

(ii) shared risk (“defined ambition”), with a promise in relation to at least some of the retirement benefits that may be provided to each member; and

(iii) defined contribution, there being no promises in relation to any of the retirement benefits that may be provided to the members.

“Defined ambition” entails risk sharing between the two parties (employer and employees). Consequently, it is unclear how CDC fits into this definition because the vision sometimes espoused for it is that risk will be shared only among members, i.e. employers would bear no risk at all. Further definition is lacking, and the Government’s intentions for CDC remain hazy. Steve Webb, pensions minister at the time of the 2015 Act, said “let a 1000 flowers bloom” but, so far, all we have is a desert. Industry requests for secondary legislation to bring CDC into effect, and with it, some clarity, have to date been unsuccessful, although the DWP is exploring existing legislation for ways to provide legal backing for the introduction of CDC schemes.2

2 Julian Barker, DWP defined benefits strategy team leader, April 2018.

3 Supreme Court 2011’s judgement, Bridge Trustees Lts vs Houldsworth.

4 As determined in section 181 of the Pension Schemes Act 1993. See Changes to the definition of money purchase benefits; TPR, July 2014.

It may be that the Government has recognised that in defining CDC it would introduce specificity, which would narrow the room for negotiation between employers and unions. Alternatively, given the absence of corporate demand for CDC, it may have decided that there are many more pressing matters to attend to.

2.2 Somewhere in the middle
(a) Legal perspective
(i) Pervading uncertainty

CDC schemes reside somewhere on the DC to DB risk allocation spectrum (between the employer and employees), but until a scheme is specified in minute detail, one cannot be sure of exactly where it will lie. Stray too close to DC, and the lack of pensions certainty will be unacceptable to many employees. Stray too close to DB, and the employer is likely to become nervous of the unknown scale of the risks being assumed.

History conspires against enduring legal certainty for pensions schemes. The Bridge ruling, for example, created confusion by determining that benefits based upon contributions on which a return was guaranteed could be considered “money purchase”, even though a deficit could arise in such a scheme.3 It was only later that section 29 of the Pensions Act 2011 clarified the definition of “money purchase” benefits, to restore it to the meaning the Government intended it to have before the Bridge case (i.e. that a scheme is only considered a provider of “money purchase” benefits if it cannot develop a funding deficit).4

Some schemes fell afoul of the clarified definition, notably hybrid schemes and schemes that offer cash balance benefits and / or internal annuities…..potentially straying into CDC territory.

(ii) What risk legislative change?

More specifically, could a CDC scheme that offers a “target” income ever be considered as a non-money purchase scheme, perhaps because of its potential to develop a “target” funding deficit? Could legislation ever be introduced that put a CDC scheme sponsor on the hook to increase retirement incomes, or meet any “target” shortfall through larger employer contributions? This would terminate a scheme’s money purchase designation, taking it into DB’s regulatory embrace. Employer debt legislation could then apply, and such a scheme could also fall within the domain of the Pension Protection Fund.

Risk #3: legal risk. Given CDC schemes’ lack of legal definition, there remains the potential (depending upon a scheme’s final design) for some balance sheet exposure, perhaps arising through “legal creep”.

Risk #4: a regulatory No Man’s Land. There is no regulatory framework in place for CDC schemes, heightening the risk of stakeholder misunderstandings.

As far as Royal Mail is concerned, it would also want to be certain that any CDC scheme would not give rise to a “constructive obligation” arising out of (past) conduct and intent, rather than through a contract. The danger is that this could be construed as a liability that should appear on the balance sheet.

(b) Regulatory perspective
Clearly, structuring a CDC scheme is about compromise, which is sometimes facilitated through ambiguity and fudge, neither of which rest comfortably within a regulated environment….whatever that may ultimately be for CDC.

Today there is little regulatory clarity in the No Man’s Land between the “money purchase” (DC) and “not money purchase” (DB) extremes. Royal Mail would, of course, strongly prefer for any scheme that it provides to be defined as “fully DC”, the alternative being to fall, by default, into the DB regulatory regime, with all its cost (and balance sheet) implications.

Perhaps one test of a CDC scheme’s regulatory identity is whether it would fall into the (DB) remit of the Pension Protection Fund (PPF)?

That aside, given the role that human judgement has in determining CDC-derived incomes (likely guided by modelling outputs), tight regulation should be expected.

2.3 Pooled life expectancy and investment risks
CDC schemes do not provide individual pension pots. Instead, employer and member contributions are pooled into a collective pot, the intention being that a continuous inflow of new employees will replenish the deceased, thereby maintaining a sufficient cashflow (and funding level). Thus, retirement incomes are effectively paid on a pay-as-you-go basis, i.e. not as annuities owned by the individual. A CDC scheme’s collective pot socialises life expectancy risk across the entire scheme membership, rather than leaving any individual with the risk of outliving his assets. Consequently, there is cross-subsidy between the different age cohorts.

The presumption of a cashflow continuum enables the investment time horizon to be extended. Less liquid (higher yielding) assets can then be more readily accommodated, and the asset allocation more heavily weighted towards (riskier) equities. Furthermore, retired scheme members are able to retain some exposure to risk assets and growth.

Clearly, to a considerable extent, CDC schemes rely on a continual inflow of new members. Part of their role is to share the risk that poor investment performance would, most likely, require them to effectively pay for today’s retirees’ incomes, albeit 7

Risk #5: reputational risk. Employers would invariably be attaching their reputations to the wellbeing of any CDC scheme that they may sponsor.

that this is not explained to the membership. That aside, given the rapid pace of technological advance, including automation and AI applications, no one could confidently assume that Royal Mail’s workforce will not shrink in the future. This would introduce complex risk management challenges, summarised as a tontine pension scheme.5

5 A tontine was originally a 17th century investment plan for raising capital, combining features of a group annuity and a lottery. Each subscriber would pay an agreed sum into the fund, and thereafter receives an annuity. As members die, their shares devolve to the other participants, and so the value of each annuity increases. On the death of the last member, the scheme is wound up. Tontine pensions rely on actuarial techniques to calculate fair transfer payments when participants are of different ages and have made different contributions. In theory, tontine pensions would always be fully funded, and the plan sponsor would not be required to bear the investment and actuarial risks.

2.4 Targets, not certainty
CDC schemes provide a notional “target” for retirement income, perhaps related to the recipient’s average salary, which is not guaranteed: incomes can be cut in extreme circumstances. Consequently, retirees are not receiving a “pension”, which most people would understand to provide certainty of income until the day they die.

Given that CDC schemes cannot become “under-funded”, sponsoring employers would not ever expect to find themselves on a legal hook to increase contributions. But, legalise aside, there is always the risk, perhaps after a large fall in asset market prices, that a sponsor could come under moral pressure to “chip in” and increase his contributions, not least to preserve good relations with employees. And unpopular decisions, such as reducing payments to retirees, could come back to haunt a sponsor.

2.5 Smoothing, through intergenerational risk sharing
(a) Complicated….with a risk of over-distribution

CDC schemes smooth members’ outcomes across generations, both by reducing retirement incomes following “poor” asset performance, and holding back any “excess” returns. Defining “poor” and “excess” is an immensely complex, judgemental process, requiring assumptions for:

(i) how the demographic shape of the membership will evolve over time (which requires assumptions for life expectancy and workforce size);

(ii) the performance of asset markets; and

(iii) an array of economic performance metrics (including interest rates and inflation).

Risk #6: irreversible inter-generational injustice through excessive liquidation of communal assets (“over-distribution”) to pay today’s pensioners at the expense of current and future employees.

Complex modelling can be used to assist decision-making, but ultimately it is people who have to decide the outcomes for a scheme’s membership. Sometimes the decision is to go back to the modelling and change some of the assumptions, perhaps until a more accommodating answer is achieved (an exercise that the USS is currently pursuing; see section 7.1).

(b) Beware of humans

Human nature is such that we are naturally inclined towards the easier path when making a decision. A decision to cut retirement incomes today, to retain more assets on behalf of current and future employees, is clearly more difficult to take than slowing the workforce’s “target” accrual rate, say. Consequently, the risk of over-distribution in favour of today’s retirees is very real, and it would leave the asset pool too small to support future generations’ “target” retirement incomes, unless the latter were reduced. In addition, there is likely to be an adverse knock-on effect on the only stakeholders not at the negotiation table: future generations of workers.

The risk of over-distribution should ring alarm bells, because the industry has demonstrated that it is not infallible in this regard: recall with-profits funds, which, if not properly controlled, invite Madoff economics (aka a Ponzi scheme). That said, it should be possible to mitigate the risk of over-distribution (or risk misallocation) between different generations using control levers, overseen by an assertive, independent governance body (see section 4).

(c) Equitable interest

One proposal to counter the risk of over-distribution is to quantify each CDC scheme member’s “equitable interest”, taking into account his contributions and the projected value of his “target” retirement income.6 Thus, an equitable interest is a deconstruction of CDC’s collective thinking. It facilitates the conversion of an uncertain future projection (the “target” retirement income) into hard cash for the individual. This effectively subordinates scheme members to recent departees because it leaves the former with all of the modelling uncertainties, as well as any subsequent asset liquidity issues. Given that there would be no practical way to “claw back” a crystallised equitable interest, it would have to be cautiously determined, with some kind of reserve retained within the scheme. This would have to be communicated to the membership, not least to mitigate the risk of past members using hindsight to encourage them to make additional claims on the scheme.

6 Con Keating has written at length about equitable interest. It is quite possible that the author’s interpretation of Con’s material is not precise, in which case apologies are due.

Risk #7: unconfirmed tax and accounting frameworks. Any potential CDC scheme sponsor would be ill-advised to launch such a scheme without absolute clarity as to its tax treatment, both for itself and also the membership. The accounting treatment is similarly unspecified.

Risk #8: incompatibility with pensions freedoms. CDC’s inflexibility in accommodating the individual can only be overcome at the price of additional cost and complexity.

2.6 Taxation and accounting
There is nothing in the public domain that indicates what the tax treatment of a UK CDC scheme would be, nor how it could potentially change if, for example, a scheme’s funding position were to diverge from what would be required to meet “target” benefits.

The accounting treatment for CDC schemes is also currently unspecified. One assumes that any potential CDC scheme corporate sponsor would first seek confirmation from the accounting profession that their scheme would be accounted for under IAS19, without a balance sheet liability.

2.7 Pensions’ freedom and choice
(a) CDC: incompatible

The end of the annuitisation requirement, announced in the Pensions Act 2014 (effective from April 2015) has proved to be very popular. From the age of 55, savers may now take cash out of their pension pots at will (taxable at their marginal rate) which is, unfortunately, at odds with CDC schemes’ collective risk sharing. The pursuit of better overall returns for all members effectively subordinates the interests of the individual.

In addition, fewer than one in three workers expects to have a fixed retirement date.7 An inflexible CDC scheme could impact upon many people’s retirement plans, but accommodating access to savings, as envisaged by freedom and choice, could potentially add significant complexity. The aforementioned “equitable interest”, representing (in theory) a member’s fair share of the assets, could facilitate withdrawals (or transfers): this is similar to a DB-style transfer value, set at a level that would not be detrimental to remaining scheme members. Either way, more complexity.

7 Global Retirement Readiness Survey 2014; Aegon.

We have been here before. This is very much like how a with-profits fund operates, with actuaries determining how to share returns across members, and across generations of members.

It is clear that CDC scheme members would likely find it more difficult to take advantage of the pension freedoms than had they saved in their own individual (pure) DC pots.

(b) Introducing CIDC

Acknowledging CDC’s incompatibility with pension freedoms, CIDC schemes have been suggested, with the “I” representing “Individual”. Scheme members would have their own pots in the accumulation phase, instilling a sense of personal ownership, and a contribution rate which would be set to be actuarially fair to each member. This would create a direct link between payments into the scheme and the benefits received, the intention being to avoid reliance on intergenerational smoothing. In addition, there would be an individually-tailored de-risking investment strategy prior to retirement, and potentially some risk pooling in the post-retirement phase.

This all sounds immensely complicated: unsurprisingly, CIDC has gained little traction.

2.8 CDC: attributes
CDC schemes are not without their attributes. Few would dispute that a fully funded CDC scheme could be expected to usually provide a better retirement outcome than drawing down from an individual DC pot. A CDC scheme’s ability to pool risk (akin to an annuity book) and reduce benefits (“smoothing”, to maintain scheme sustainability in event of weak markets) help to mitigate longevity risk between individuals within an age cohort, and investment and inflationary risks between cohorts.

In addition, pooled investment should make for economies of scale. Furthermore, a membership continuum should remove constraints that arise when providing an absolute outcome to one individual.8 The investment time horizon could therefore be extended, beyond an individual’s life expectancy, to produce potentially higher returns by assuming more investment risk than otherwise, and by making a larger allocation towards less liquid assets such as infrastructure (which usually provide a return premium).

8 An individually-tailored annuity income or drawdown requires a more cautious approach to investment, particularly in later life (“de-risking”). The risk of pot exhaustion pertains to individual pots, not a pooled (CDC or with-profits) fund.

9 Robin Ellison, FT Letters, 10 December 2013, quoting from The Case for Collective DC; a new opportunity for UK pensions; Aon, November 2013.

Consequently, CDC schemes provide both a lower risk / return ratio than an individual DC pot and a narrower range of potential outcomes for the individual, i.e. some inherent risk reduction, akin to a feature of insurance. However, claims that CDC will produce a 40% increase in expected median pension outcomes compared to a traditional DC-derived pension are unsubstantiated (and, in some cases, self-serving), lacking longitudinal evidence to support them.9 Consequently, they defy credibility.

But that aside, the motor for such claims, the extension of risk-taking into retirement, is not exclusive to CDCs.10 It is, of course, a feature of annuity books and with-profits funds, both of which also collectivise risk.

10 See Stuart Fowler, FT Letters, 18 December 2013.

3. CDC: a rebranding of with-profits?
3.1 Scarred by Equitable Life

The CDC concept resembles the with-profits life insurance product, tainted by the Equitable Life scandal that came to a head in the late 1990’s. In the 1970’s Equitable had been selling policies with a guaranteed annuity rate (GAR) set at rates which reflected the decade’s high inflation rate. In 1999 Equitable won the “pension provider of the year” title, evidence that complexity and opacity can successfully mask reality, albeit only temporarily. A year later it closed to new business; years of low inflation and interest rates had culminated in Equitable being unable to meet its commitments. Some 800,000 policyholders lost money.

Subsequently, the Penrose report aimed to uncover lessons to be learned from the Equitable fiasco. Essentially, to attract more business, Equitable had over-promised to policyholders and paid excessive (discretionary) bonuses. In addition, there was regulatory failure, which had been exacerbated by a terrible relationship between regulators and the company’s CEO (Roy Ranson, an actuary) whom Penrose described as “manipulative”, “autocratic” and “aggressive” in his dealings with the regulators. Ultimately, Equitable’s undoing was a toxic combination of greed, weak regulation and lax governance, i.e. human failure.

3.2 CDC: not quite with-profits
(a) Provenance

With-profits funds were conceived by life insurers as a means of distributing funds’ unplanned surpluses, perhaps arising from lower than anticipated death rates. They subsequently evolved as a form of long-term collective investment vehicle with the flexibility to pursue a more adventurous investment policy. Conversely, CDC schemes aim to provide non-insured retirement incomes, based on collective pooling of longevity risk and the collective investment of contributions.

(b) No guarantees, so no reserve fund?

Unlike with-profits funds, CDC schemes do not provide guarantees and therefore, ostensibly, do not require any form of (insurer’s) reserve fund. But CDC volatility (i.e. reserve) funds are being discussed, to cover any shortfall in targeted payments. Initially, they would have to be funded by contributions from employees and employers but, ideally, over time a portion of the investment returns would be retained rather than paid out to retirees.

(c) Investment objectives

Given their adverse publicity, an increasing number of with-profits funds are closing to new business. Once closed, their focus shifts to primarily managing liabilities (i.e. meeting past guarantees), by investing in low-risk assets such as cash and bonds, rather than seeking to maximise investment returns. CDC schemes would claim to be different care of their unlimited investment time horizon…..but once upon a time with-profits funds made the same claim.

(d) No recourse?

With-profits funds have legal recourse to their provider, whereas CDC schemes are unlikely to have any such recourse to their sponsoring employers. But, as discussed, there is the risk of moral recourse.

(e) Opacity and accountability

The Financial Conduct Authority’s (FCA) 2010 review of with-profits policies criticised insurers’ inability to clearly communicate how their funds operate (key to managing policyholders’ expectations). In addition, the FCA identified weak monitoring of with-profits funds, and expressed concerns that policyholders’ interests were not properly protected: a failure of governance.

Inevitably, savers and investors have become suspicious of complex products piloted by black boxes, particularly when they may determine policyholder bonus decisions. CDC schemes would be similarly afflicted.

4. Strong governance required
4.1 Independent oversight

Any CDC scheme should be overseen by a professional and independent governance board. Its principal role should be to preserve scheme sustainability, closely allied to maintaining intergenerational fairness by guarding against over-promising to older employees, and over-distributing to retirees. This inevitably results in diminishing what could be subsequently delivered to younger members. Alarm bells include demographic instability (including a shrinking workforce and actuarially unanticipated improvements in life expectancy), weak investment performance and accelerating inflation, all of which conspire against sustainability.

Particular emphasis should be placed on cashflow scrutiny; historically, with-profits funds have placed too much reliance on nebulous valuations reliant upon long range assumptions for discount rates, asset performance, etc. (although they could provide an early harbinger of trouble to come).

The board’s members could consider themselves as reputation guardians, behaving as principals, not agents, with a total commitment to transparency and the use of multimedia for communication. Investment performance, for example, should be regularly disclosed online, publically, not least to minimise the scope for surprises.

4.2 Plenty of tools
There is a variety of control tools available but, crucially, they should be assertive, prescriptive (discretion should be minimised to minimise animosity) and applied across the whole membership. It should be, for example, unacceptable to only require younger members to make higher contributions to protect the benefits of existing retirees.

In addition, control levers should, ideally, be pulled early. Delay, and it could be too late to reverse a “death spiral”.11 Thus if, for example, a target funding ratio were to fall below 110%, say, then rather that prompting a meeting of stakeholders to chat about what to do, remedial actions should be immediately triggered. These include one or a combination of cutting retirement incomes, increasing the contributions rates, slowing the accrual and / or the indexation rates, lowering “target” pensions and, in extremis, clawing back benefits already notionally accrued.

11 Witness, for example, the consequences of lax governance on some of the LGPS’s funds.

12 Ray Blake, a financial planner at Talking Finances, referring to Phoenix Life applying a MVR which equated to 22% of a £101,000 policy.
13 The case for collective DC; Aon Hewitt, 2013.

14 See Modelling Collective Defined Contribution Schemes at

Note that a 7% drawdown rate from an individual DC pot would seriously risk pre-death pot exhaustion, indicating that a CDC scheme could be a sounder form of retirement provision.

4.3 Learn from with-profits
With-profits funds’ market value reductions (MVR) provide a similar cost control function, reducing the value of a policy that is surrendered early to reflect poor investment conditions. The communications challenge was recently illustrated by a financial planner who described one MVR as “punitive and arbitrary and completely unfair.”12 This hints at a major failing of with-profits funds: opacity in respect of costs and charges associated with achieving smoothing, accommodated by weak governance.

Royal Mail has yet to publish any plans for the independent oversight of its potential CDC scheme.

5. PPI modelling of CDC
5.1 Promising….in theory

In 2015 the DWP commissioned the Pensions Policy Institute (PPI) to develop a CDC model to seek to independently replicate the approach taken in some earlier CDC modelling by Aon.13 The PPI’s model looks at a potential CDC scheme under different assumptions to determine whether it would produce better results compared to individual DC, and in what circumstances.14 It concluded that:

In the short term, with no initial pre-funding, the benefits of the modelled CDC scheme are similar to that of a DC scheme with an aggressive drawdown (7% per year).15 However, the modelled CDC scheme would be less likely to run out, and the outcomes are still higher than a DC scheme with an annuity. 14

In the long term, once the scheme is mature and the scheme population is stable, CDC produces better outcomes (a replacement rate of between 27% and 30%) than DC (a replacement rate of between 12% and 21%, assuming a 10% contribution rate). The PPI modelled CDC scheme also requires a relatively low contribution rate to maintain these outcomes.

Clearly, the PPI’s long-term projection16 suggests that in theory a CDC scheme could produce a better return to members than individual DC arrangements. But it only quantifies the value of CDC as a potential destination, in the form of a long term stable position.

16 The PPI used a stochastic microsimulation model, their reported outcome being the central result. Any scenario as pertains to an individual could turn out better….or worse.

The RMPP was closed to closed to future accruals at end-March 2018.

This raises a crucial question: to what extend does a potential Royal Mail CDC scheme lend itself to PPI’s analysis?
5.2 PPI modelling: inconsistent with Royal Mail’s situation
The PPI’s modelling of a CDC scheme assumes:

(i) a mature scheme membership with a stable population, i.e. that there will be a continuous flow of contributing new entrants to cross subsidise (i.e. fund) the retired, thereby maintaining a sufficient funding level. But given the rapid pace of technological advance, including automation and AI applications, no one could confidently assume that Royal Mail’s workforce will not in future shrink relative to its pensioner population;

(ii) it is fully funded from inception. Given that Royal Mail is proposing to establish a new CDC scheme, it is unlikely to start with much, if any funding, very much at odds with the PPI’s modelling. Initially there would be no opportunity for economic risk sharing between age cohorts, so future accrued benefits would have to be met from the beneficiaries’ own contributions (and asset performance). Over time, the scheme could trend towards full funding, provided there were a sufficient number of in-coming active members to “mature” the membership and assume, through time, a growing share of the economic risks from longer-term members. New members would, of course, need to hope that there would be another generation behind them to do likewise. Intergenerational risks aside, attaining scheme stability would likely take at least a generation.

Alternatively, Royal Mail could make an initial asset transfer into the scheme, which would shortened the time required to achieve stability. These assets could come from Royal Mail itself (i.e. shareholders, who would object) or the Royal Mail Pension Plan (RMPP), which would weaken the latter’s financial condition; the RMPP is already expected to fall into actuarial deficit sometime in 2018.17 Given that the employer is liable for RMPP deficits, but not for the health of any new CDC scheme, any such asset transfer would be bizarre indeed;

Risk #9: modelling risk. CDC proponents point to superior returns relative to DC pots, but these are modelled, not founded upon empirical evidence, underpinned by assumptions (a “mature”, stable and fully funded scheme from inception) that are wholly inappropriate to Royal Mail’s particular circumstance.

(iii) all the members of the scheme are aged over 40. Consequently, per member contributions in the modelled scheme are significantly higher than would be the Royal Mail reality (it employs a lot of people under the age of 40); and

(iv) benefits would be immediately cut when investment returns were low. In practice there could be a significant time lag between poor returns and cuts to benefits. Negotiations could be a drawn out process, likely to result in some form of fudge that penalised the next generation of scheme members (who would not be represented at the negotiating table). In the meantime, unreduced retiree incomes, for example, would deplete the assets faster than otherwise, reducing the underlying fund’s future returns.

In addition, following death, the PPI’s model attributes no value to any residual assets in an individual’s DC pot, nor to the drawdown flexibility that such pots offer.

5.3 Conclusion: PPI modelling
The PPI’s assumptions for their modelled (idealised) CDC scheme significantly flatters the case for a CDC scheme compared to individual DC pots. By the PPI’s own admission “the results are heavily dependent on what we assume the starting position to be”, and that “it is possible to design different models and use alternative assumptions that could lead to different outcomes”.18

18 See Modelling Collective Defined Contribution Schemes at

In addition, by assuming that a new CDC scheme would be “mature”, stable and fully funded from inception, the PPI is conveniently sidestepping the awkward transitional issues that Royal Mail is likely to meet prior to the scheme achieving such a status. Consequently, it is challenging, to say the least, to envisage how the PPI’s work lends itself to supporting the case for a start-up Royal Mail CDC scheme. Yet this is what CDC proponents would have us believe, notwithstanding the lack of any quantification of the risks involved.

Royal Mail has yet to make public how it intends to achieve a fully funded, stable CDC scheme.

Risk #10: employer / employee miscommunication. It is unclear to what extent there is a gap between the CDC pension scheme that Royal Mail is offering and what its workforce thinks it voted for. Is there a risk of inadvertent mis-selling?

6. Mind the communication gap
6.1 Open to interpretation

CDC presents a Niagara of opportunities for misunderstandings between Royal Mail’s management and the unions representing the workforce.19 For example, the meaning of “target” is wide open to interpretation. Both parties may even misunderstand their own positions because CDC is so ill-defined, let alone fully appreciate the other party’s position. Pension schemes, irrespective of hue, are notorious for their membership’s lack of comprehension and engagement (shareholders too).

19 The Communications Workers Union (CWU) represent most of Royal Mail’s frontline employees and Unite/CMA represent junior and middle managers.

20 The Times; Patrick Hosking, Financial Editor, 27 January 2018.

21 Royal Mail’s share price was 631p on 11 May 2018, up from 378p six months earlier, adding £4.0 billion to the company’s market capitalisation.

22. Jenny Hall, head of regulatory engagement at Royal Mail, speaking at a conference hosted by Cass Business School on 9 April 2018.
Royal Mail’s perspective is almost certainly that of not wanting to provide a pension scheme that includes any element that could be construed as DB, with the attendant balance sheet risks. But does the workforce fully appreciate that in such circumstances their employer would be effectively a disinterested party, with no intention of lending additional support in event of a substantial fall in asset market prices, for example?

6.2 Muddled reporting
In January 2018 it was reported that “the mediator recommended that the two sides should commit to a so-called “collective defined-contribution” scheme with a defined-benefit element”.20 The unions will, no doubt, have logged this interpretation, but have Royal Mail’s shareholders grasped its significance? Royal Mail’s share price suggests not: it has risen by 67% in the last six months, albeit falling back more recently.21

Elsewhere, DB language has been adopted in a CDC context, such as the totally misleading “DB-style benefits”. Indeed Royal Mail itself has comingled DB and CDC terminology, one manager referring to combining a CDC scheme with a DB-style lump sum at retirement.22 Maybe the meaning of “DB” is changing to accommodate circumstances, but the communication risk is not helped by the lack of clarity as to what “CDC” actually means.

Any CDC scheme needs to be accompanied by explicit communications describing the potential risks to members’ retirement benefits: expectations management to the fore.

7. CDC: a political perspective

7.1 The Universities Superannuation Scheme (USS)

(a) Second in line for CDC?

The USS (technically in the private sector, but many perceive it as quasi-public sector) is currently the loudest canary in the DB mine.23 Its accounting deficit is accelerating rapidly, up by some £9 billion, to £17.5 billion, in the year to end-March 2017 (with assets of £60 billion).24 On a technical provisions basis the deficit was £12.6 billion.25

The USS offers a DB 1/75 accrual rate up to a salary threshold (£57,216.50 for the 2018/19 tax year, automatically revalued each April in line with USS pension increases), along with a tax-free cash lump sum of 3x pension. The scheme is DC above the threshold.

24 As measured by the Financial Reporting Standards (FRS) issued by the U.K.’s Accounting Standards Board and Financial Reporting Council. Accounting standards assume that all the investments are in AA corporate bonds; the USS’s actual portfolio is far more diverse, and may, or may not, generate a better return.

25 Technical provisions are a funding target which U.K. schemes must set, based on The Pensions Regulator’s rules. They offer a target figure on which to base a recovery plan to plug deficits.

26 This limited the DB element of the scheme to the first £55,000 of a member’s salary, with DC provision above that. Previously, for pre-2011 members, the package was entirely DB.

27 Reshaping workplace pensions for future generations, chapter 5; DWP, November 2013.

Combined contributions of 26% (employees 8%, employers 18%) are deemed insufficient to maintain the current scheme (albeit high by private sector standards): roughly 37% is required. Consequently, the USS is primed for change, however unwelcome that may be. Universities UK (UUK) has proposed ending all future DB accruals, but it is unlikely to successfully sell pure DC to the 400,000 academics and other university staff within the scheme. Given that Royal Mail would appear to have successfully sold “CDC” to its employees, UUK will be observing how Royal Mail performs on the CDC test bed.

Meanwhile, resolution of the USS dispute has descended into wrangling over technical modelling assumptions; the “discount rate dance” continues apace. It will do nothing to assuage the harsh reality of a deteriorating cashflow, which is the ultimate arbiter as to the USS’s sustainability.

(b) The Government: not impartial

It is not clear how the USS will emerge from the current impasse. Trust between the key stakeholders has perhaps been fundamentally undermined by the rapid succession of different reforms to the retirement benefits package. Perhaps most notably is the prospect of ending all DB accruals, when a mixed DB / DC package was only introduced in October 2016.26 But, given British universities’ contribution to the economy, the Government is not an impartial observer. It may yet be persuaded to formalise some form of CDC structure to help resolve the USS’s labour dispute, despite already having taken a close look at CDC.27 Ultimately, the future for CDC in the UK may well boil down to political considerations. It will certainly not be because of a proven performance track record.

7.2 Public service pensions
CDC’s appearance in the pensions narrative is partly a confession that DB pensions can no longer be provided on a sustainable basis. Today the private sector is almost a DB desert, yet the UK’s public sector is firmly in denial.

Consider our unfunded public service schemes (NHS, teachers etc.). In 2005-06 there was an irrelevant £200 million cashflow deficit between contributions and pensions in payment. Notwithstanding the Hutton reforms, this rocketed to £11.2 billion in 2016-17, a cashflow gap that had to be plugged by the Treasury out of general taxation. It continues to grow rapidly, forecast to be £16.6 billion in 2022-23.28

28 Autumn Budget 2017, Table C.6: Total managed expenditure; HM Treasury, November 2017.

29 CDC: with-profits in disguise? Henry Tapper’s Pensions Playpen, May 9, 2018.

30. Stefan Lundbergh, Head of Innovation, Cardano Risk Management.
This is an arena into which British politicians fear to tread. Without cross-party political support, no one is likely to propose ending DB schemes’ future accruals, and introducing retrospective changes such as converting accrued DB pension rights to “target income” would be considered beyond the pale……albeit that this is now happening abroad (for example, New Brunswick, see below).

And then there is the Local Government Pension Scheme (LGPS) to consider: its canary is currently being ignored by a weak and Brexit-distracted government.

7.3 Political philosophy
The word “collective” resonates with those on the left of the political spectrum, along with CDC’s socialisation (i.e. pooling) of risks. Henry Tapper paints an alluring picture:29

CDC moves beyond the practices of with-profits funds in the latter part of the 20th century and reconnects with the earlier principles of mutual societies which were based on mutual protection. Of course, we have tools in the twenty first century that were not around in the nineteenth, when mutuality first prospered. But CDC links back to that earlier “disintermediated” time, when what people got in retirement was linked to the collective endeavour and integrity of a mutual society.

A conference speaker once said “there is no economic justification for CDC: its value is behavioural, bringing a collective mind set to people, i.e. there is someone looking after my best interests, collectively, against the market”.30 Certainly, individuals lack the organisation capabilities to collectivise risk, and many people do not want control or decision-making responsibility for something that they do not understand. Indeed, CDC prompts some major societal questions, such as are we a collective or a nation of individuals? How we answer this has implications for our national identity.

7.4 Funded or unfunded?
Henry goes on to observe that CDC-based retirement provision need not necessarily be attached to an asset pot, i.e. that it could be unfunded, with retirement incomes met on a pay-as-you-go basis. Such an approach would, however, lose the security value that an asset pool provides, helping to assuage any lack of trust in a scheme. Assets also help gauge scheme sustainability, notably the ability to continue paying retirement incomes.

But recall that a previous government assumed Royal Mail’s assets and liabilities; perhaps the current one could be persuaded to do likewise for the USS (putting the deficit question to one side)? A clean CDC scheme could then be introduced (in respect of future service only).

7.5 The DWP’s stance
The DWP’s position on CDC schemes is that “while we look at options, it is not right to advise on timescale, delivery or feasibility“.31 What is clear is that any change to legislation would not be bespoke to Royal Mail, and would follow the parliamentary process, including a consultation.

31.FT article by Josephine Cumbo, 1 May 2018.
32 See Risk sharing pension plans: the Dutch experience; PPI, October 2014.

33 See Pension Liability Measurement and Intergenerational Fairness; Theo Kocken, Professor of Risk Management, VU University Amsterdam, 2012.

One potential avenue could be to introduce a slightly different definition of “money purchase”, to include risk pooling amongst members, accompanied by an explicit statement that “target” incomes could not under any circumstance develop a (notional) funding deficit, thereby accommodating CDC schemes.

8. International experience of CDC
8.1 The jury is still out

There are a number of CDC risk-sharing pension plans in operation aboard, notably in Canada, Denmark and the Netherlands, but no two are directly comparable. Each has its own problems, and the Dutch, in particular, are divided over CDC’s long-term sustainability, fuelled by:32

(i) years of poor investment performance;

(ii) a diminishing appetite for sharing risk between generations (fuelled by a lack of independent oversight of how payments are redistributed from young to old members);

(iii) criticism of the liability valuation techniques being used, which could lead to “deeply damaging intergenerational wealth-distribution effects“33; and

(iv) opacity concerning members’ individual property rights and also the ownership of any surplus. 20

Dutch schemes have experienced highly contentious contribution increases and income reductions (by up to 6%). These have been damaging to employer-employee relations and have prompted accusations of inappropriate scheme design and excessive regulation.

Some Canadian schemes have crossed the Rubicon by converting accrued rights in existing DB plans into different forms of “target income” plans, a predictably controversial move (but perhaps necessary from a sustainability perspective).34

34 See Risk sharing pension plans: the Canadian experience; PPI, October 2014.

35 Dutch contributions are typically some 20% of pay, substantially more than the minimum 8% of band earnings that the UK’s automatic enrolment will attain in 2019.

Germany, recognising that its DB-centric pensions framework is unsustainable, recently passed legislation that defined DC provision for the first time, and also to allow for (insurance-regulated) CDC scheme implementation. Employers and unions agreed that any such scheme should include a contributions-funded reserve against adverse risks, and that the unions would be part of the governance structure.

8.2 Cultural differences abound
(a) The Netherlands

The Dutch workplace is characterised by a highly unionised collective bargaining environment so, perhaps unsurprisingly, the CDC principles of collectivism and solidarity feature strongly in the Dutch pension system.35 The UK is very different, with individualism ascendant. We now expect clearly-defined individual property rights and considerable flexibility in respect of both the accumulation and decumulation phases of a pensions scheme. The Dutch CDC model provides no such flexibilities. Retirees can only receive their pension at the time and in the format set out in the scheme rules, leaving little room for manoeuvre.

In addition, notwithstanding automatic enrolment, workplace scheme participation in the UK ultimately remains voluntary (unlike in Canada and the Netherlands). Consequently, the Dutch vision of CDC does not lend itself readily to the UK circumstance.

(b) Canada

The Canadian province of New Brunswick offers a pensions scheme that is sometimes referred to as the bellwether for risk-sharing between employers and employees. Regular stress tests are intended to ensure that the “target” benefits remain realistic under adverse economic circumstances, thereby preserving the sustainability of the scheme. The scheme claims that the division of risks and rewards is transparent, and that prescriptive rules determine what would happen in the event of any projected shortfall.

However, one actuary’s report36 suggests that the New Brunswick scheme has significant shortcomings that together provide “a recipe for disaster”, including:

36 New Brunswick shared risk plan: there’s more to the story; PBI Actuarial Consultants Ltd, Pension Update, 21 August 2015.

37 Decision Technology. Survey size: 938 auto-enrolled scheme members (2017).

 that the provincial government scheme sponsor broke past promises by unilaterally changing the scheme from one of “guarantee-to-pay” to “hope-to-pay”. In addition, the changes are retrospective, i.e. they include benefits already earned;

 “incomplete and misleading” membership communication. In particular, the scheme was described as a “shared risk plan” which implies the equal sharing of risk between employer and employees. In reality the employees ultimate bears 100% of the risk, with the sharing being between scheme members. A better description would have been a “target benefit plan”;

 ambiguous descriptions as to what benefits would actually be paid (specifically, which pre-retirement earnings escalation and post-retirement indexing would be used); and

 flaws in the stochastic model used to support the case for the scheme, notably inappropriate input parameters and assumptions.

The report concluded that the New Brunswick scheme is a “potentially dangerous model for use in the pensions industry in Canada”. Not very encouraging.

(c) Germany

Germany’s interest in CDC is fuelled by overt state paternalism. There is widespread concern that the individual lacks the necessary education or engagement required for pensions-related decision making. The author shares these concerns in a UK context, but this does not mean that CDC schemes are the answer.

9. Royal Mail: no scheme required
9.1 Workplace pensions: a flawed perspective

Today, workplace pension schemes are set up from the wrong perspective, with the employer / provider relationship pre-eminent. Employers choose their providers, and then, typically, the selection of the funds works primarily for the employer (low risk) and provider, not necessarily for the employee.

A survey of auto-enrolled scheme members found that an extraordinary 39% of those surveyed were unaware that they were a member of a workplace pension scheme.37 It also found that 95% had never tried to change their fund, 91% did not know where their funds were invested, 80% did not know how much was in their pension pot and 34% did not know who their pension provider was.

Engagement is clearly lacking, partly because being a member of a nebulous occupational pension scheme does not engender a sense of personal ownership. Few scheme members have, for example, identified a beneficiary after they die. Workplace-derived savings should be as personal to the employee as his bank account.

Royal Mail does not need a new CDC scheme. Indeed, there is no need for any entirely separate workplace-dedicated savings architecture. Each employee could have his own, personalised, savings pot capable of accommodating both his own and his employer’s contributions.

9.2 Defaults to the fore
During the period of accumulation, individual DC pots should be invested in diversified, low cost default funds, providing economies of scale. After reaching private pension age (which should be 60; 55 is much too early) employees and retirees should be defaulted into, say, 15 (or 20) years of income drawdown, while remaining invested in low cost default funds. This is “auto-protection”, detailed38 by the author in 2017, and subsequently (March 2018) recommended to the Government by the Work and Pensions Committee.39

38 Auto-protection: auto-drawdown at 55, auto-annuitisation at 80; CPS, March 2017. In 2010 the author proposed the end the annuitisation requirement provided that both the state and the individual are protected (see Simplification is the key; stimulating and unlocking long-term saving; CPS, June 2010). Pension freedoms were introduced in 2015, but unfortunately the protection part was not implemented: this prompted the proposals for auto-protection.

39 Pension freedoms, Ninth Report of Session 2017–19; Work and Pensions Committee, March 2018.

Later on in retirement, longevity risk should be pooled by default, in the form of a lifetime annuity, commencing at the age of 75 (or 80). This is “auto-annuitisation”, to mitigate the risk of playing chicken with one’s life expectancy (i.e. running out of money). Consequently, the collective aspect of the package would increase in later life.

The choice to opt out would be available at each stage.

9.3 Default funds: with-profits
The default funds could be in the form of with-profits funds, which share many of a CDC scheme’s attributes and underlying performance drivers. This arrangement could be accommodated within today’s legislative framework. The funds would:

(i) not provide guarantees;

(ii) include regulated consumer protections (including a default fund charge cap), as per today’s occupational pensions schemes; and

(iii) be overseen by a strong, independent, governance body, not least to consider the risk of over-distribution, i.e. the perpetration of intergenerational injustice. 23

The with-profits funds could be arranged in a number of different ways. One approach could be to use a series of unitised with-profits funds during the asset accumulation phase (thereby pooling investment risk), units being purchased with each contribution.40 CDC’s “target” language could be used throughout accumulation. Upon reaching private pension age, the units would be “cashed in” through a transfer into a conventional with-profits fund; this would provide drawdown income until auto-annuitisation, funded by a terminal bonus. The funds could be age-cohort specific, each perhaps five years in “length”, which would help mitigate the risk of over-distribution.

40 The price of a unit would be determine by the fund’s prevailing asset value (thereby reflecting the performance of the fund).

41 Here is no need to combine any ancillary employee benefits package with retirement provision.
42 For details, see Looking after members’ money; NEST’s investment approach, page 13; NEST.

Ideally the retirement pots would be included on the forthcoming pensions dashboard, alongside State Pension provision.

9.4 Providers
Royal Mail’s role could be limited to arranging for the bulk provision of retirement savings accounts for its workforce, negotiating the default funds and making regular employer contributions as negotiated with the unions.41

(a) Retirement accounts: use NEST

The obvious provider of a large number of individual accounts is the National Employment Savings Trust (NEST). Over six million members have now been automatically enrolled into NEST, by over 600,000 UK employers: NEST’s systems are well accustomed to handling large numbers of individuals.

(b) Default funds: lack of choice?

Given the size of its workforce, Royal Mail and NEST should be in a strong position to negotiate access to low cost with-profits funds. However, there is a lack of competition: there are very few providers actively seeking new with-profits business. Prudential’s PruFunds range dominates the with-profits market, with £32.6 billion in assets at the end of September 2017, aided by M&G’s strong fund management performance. Aviva has recently launched its Smooth Managed Fund to compete with Prudential, and other providers include NFU Mutual, Royal London and Wesleyan. Legal & General closed its with-profits fund in 2015.

(c) NEST as funds provider

An alternative approach would be to use NEST’s existing (default) Retirement Date Funds for the asset accumulation phase.42 NEST is currently prevented from providing decumulation products to its members but the author, and others, have lobbied Parliament to change this. Common sense has now prevailed: the recent Work and Pensions Committee report recommends that NEST should be allowed to 24

offer a new default drawdown pathway.43 In so doing, NEST may care to consider any recommendations that emerge from the FCA, whose 2017-18 business plan includes a thematic review into the with-profits sector. Perhaps this could be accompanied by some suggestions for a rebranding of “with-profits” funds?

43 Pension freedoms, Ninth Report of Session 2017–19; Work and Pensions Committee, March 2018

The DWP is sensibly demurring on proceeding with CDC schemes. Notwithstanding their attributes, the lack of private sector demand for them, and CDC schemes’ similarities to with-profits funds, suggests that the innovation opportunity rests in improving with-profits funds’ governance arrangements (incorporating communication and transparency), and a rebranding to assuage an unfortunate history. CDC schemes in the UK are superfluous.

Yours sincerely

Michael Johnson

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