Pension legislation CDC scheme

[toomuchcoke]

The other problem is that these closed funds are not a pot of money as most people would think but a mixture of assets, corporate bonds, government gilts, share portfolios and even physical properties. A fund may place a nominal value on these assets but like anything else when you have to sell them they're only worth what someone is willing to pay for them. Most closed schemes de-risk their investments into safer assets but safer assets produce less investment returns and if as expected we see a glut of closed DB schemes trying to de-invest over the next 20-30 years it could potentially end up as a fire sale with many schemes struggling to stay afloat without government intervention.

It's going to be interesting to see what they do with ours.

If the db pension scheme is mostly investing in gilts (or corporate bonds) and expecting to be de-investing gradually over the next 20-30 years then it's moderately trivial to buy a spread of gilts/bonds that mature over the desired timescale. It's not really so very different from the set of calculations needed to produce annuity pricing.

There was a similar example of this a couple of years back in a national newspapers finance section. A member of the the confederate forces from the American civil war, married aged 80. He married an 18 year old. SHE finally died in 1976 and the US government had to pay a war pension until she died. It was only $50 a month, but it must have cost a bit. An exaggerated example of cost, but you can see the potential problem.

Hermann Göring's brother did something similar, though not to the same extreme in terms of age difference. He married his housekeeper in 1966, and then died a week later.

[fishtank]

If the db pension scheme is mostly investing in gilts (or corporate bonds) and expecting to be de-investing gradually over the next 20-30 years then it's moderately trivial to buy a spread of gilts/bonds that mature over the desired timescale. It's not really so very different from the set of calculations needed to produce annuity pricing.

The problem with this calculation is that you're no longer dealing with an open fund where contributions can be varied and future provision can be adjusted to protect the fund.

If you calculate your de-investment on mortality rates and get it wrong by even a tiny fraction you start eating yourself very quickly and the effect on the fund is exponential. Without a surplus or any contributions you have zero contingency so one of the questions will be will ours be left without a surplus?

[toomuchcoke]

If the db pension scheme is mostly investing in gilts (or corporate bonds) and expecting to be de-investing gradually over the next 20-30 years then it's moderately trivial to buy a spread of gilts/bonds that mature over the desired timescale. It's not really so very different from the set of calculations needed to produce annuity pricing.

The problem with this calculation is that you're no longer dealing with an open fund where contributions can be varied and future provision can be adjusted to protect the fund.

If you calculate your de-investment on mortality rates and get it wrong by even a tiny fraction you start eating yourself very quickly and the effect on the fund is exponential. Without a surplus or any contributions you have zero contingency so one of the questions will be will ours be left without a surplus?

... and obviously anyone doing this kind of calculation would either never think of that, or would think of it but decide to ignore the problem as "too hard"? Clearly what they would never even think to do is take a pessimistic view of changes in mortality rates, and future investment returns and calculate on that basis, and then revisit those assumptions and calculations on a regular and reasonably frequent basis. Obviously they wouldn't seek to have any kind of safety margin, especially in the earlier years, too? Because obviously highly paid actuaries who do this sort of thing for a living all the time do bit by throwing darts at a newspaper.

And you're wrong that there's no source of future contributions BTW. So long as the pension scheme still has members, and so long as the Royal Mail continues to exist then it's still liable for making up any deficit that should occur. Even a closed fund is still sat there affecting the figures in the annual report. The more interesting question is, what happens if there's a surplus after the last person to be entitled to pension dies? (Or more probably, when the last few remaining pensioners have their payments turned into annuities thus de-risking the scheme almost entirely and reducing the ongoing admin costs to basically zero.) Who gets that surplus?

[jetblack]

Ask yourself 'what am I guaranteed in retirement ?'

All the rest is smoke and mirrors.

I'm beginning to think that the degree of complexity (being introduced) in UK pensions is a deliberate obfuscation technique.

How much is the employer willing to guarantee ? How does this compare to what we were previously guaranteed ? Is it a just and equitable level of (guaranteed) payout given the earnings and profit of the company/our contributions/the growth in the wealth produced by the country annually/the growth in the wealth produced by any country in which the pension scheme is invested ie. global growth ?

[heapsy]

It doesn't look as if anything is guaranteed. Our union rep is still trying to sell this as a wage in retire etc etc. It is no such thing. There are targets to reach, but any stock market based investment is subject to investment returns. My fear is that investment choices will be poor at best.

[RobertT]

The following is taken from this pdf file on the CWU website, and gives a little hint of a bit more detail:

In respect of pensions and as previously reported, a Wage in Retirement Scheme, with a DB lump sum element is now being worked up. What is not yet agreed are the targeted outcomes and RMG’s overall contribution but these are being worked through in a more positive manner.

You will also recall that both parties were committed to joint lobbying activities to push through the regulations required for our scheme to be introduced. To this end, in the last week, we have jointly attended a Friends of Collective Defined Contributions Meeting at the TUC to promote our case for a new Defined Ambition Scheme and discuss required lobbying activities.

The CDC Group (which includes Representatives from the TUC, First Actuarial, Senior Civil Servants from the DWP, business groups, pension stakeholders and other interested parties) has been campaigning for a number of years for the same regulations to be introduced that we require for our proposed Royal Mail Group Scheme. In addition, both parties have agreed a series of information sharing and joint lobbying activity targeting key politicians and Government Departments.

It seems to me that a CDC scheme will have a guaranteed lump sum similar to the Cash Balance scheme, but smaller. With the addition of a variable ‘wage in retirement’, dependent on investment returns.

[heapsy]

This may be a difficult one to answer, and apologies if the question has been asked before: what is the difference, in monetary terms, between section A/B and section C? In other words, how much difference say between 20 years A/B and 20 of section C? I understand it would depend on other factors, such as when the service started / finished etc. I'm just trying to get a rough idea as to the difference in accrual rates etc. I have a plan to bridge the gap, so to speak, through various sources of income, hopefully tax free. Any help would be gratefully received. Cheers for now.

[RobertT]

This may be a difficult one to answer, and apologies if the question has been asked before: what is the difference, in monetary terms, between section A/B and section C? In other words, how much difference say between 20 years A/B and 20 of section C? I understand it would depend on other factors, such as when the service started / finished etc. I'm just trying to get a rough idea as to the difference in accrual rates etc. I have a plan to bridge the gap, so to speak, through various sources of income, hopefully tax free. Any help would be gratefully received. Cheers fro now.

That’s something that’s quite difficult to work out accurately. Because not only do the 2 schemes offer different benefits, but you’d have to factor in wage rises over the years.

The basics are as follows, but you can get more info by comparing the Plan Guides on the pensions website.

Section A/B
No Lower Earnings Deduction
Accrual rate of 1/80ths
Lump sum as standard of 3 x pension
Rises with CPI in payment

Section C
Lower Earnings Deduction of £3,328
Accrual rate of 1/60ths
No standard lump sum
Rises with RPI in payment

[fishtank]

On a related note I noticed BT lost their case at the high court while attempting to change the uprating of part of their pension from RPI to CPI.

[heapsy]

On a related note I noticed BT lost their case at the high court while attempting to change the uprating of part of their pension from RPI to CPI.

Yes, I remember seeing that somewhere too. Will be interesting to see what happens in the future.

[FAB]

On a related note I noticed BT lost their case at the high court while attempting to change the uprating of part of their pension from RPI to CPI.

Their pension schemes sound a lot like ours with their A and B schemes now using CPI and their Section C using RPI as it was setup. Wonder if this all dates back to the days when the GPO covered post and phones... Bet RM would love to change their section C to CPI! Watch this space!

[fishtank]

Wonder if this all dates back to the days when the GPO covered post and phones...

It does.
They share the same DNA, like brothers from another mother. Split in 1981 when BT was seperated from us.