CDC legislation update

[RobertT]

RobertT do you think there is even the slightest chance that RM will just use the existing or new DC scheme with the addition of the existing Cash Balance scheme for lump sum purposes? It seems to me that this would probably be the most likely of outcomes.

The Cash Balance scheme provides a lump sum to take with existing RMPP benefits and is part of the RMPP.
During the 4 pillars negotiations, the mediator suggested the DBCBS only had a lifespan of about 5 years and then it would get too expensive for the RMPP, due to its liabilities increasing.
Plus RM's request to 'attach' the DBCBS to the RMSPS was rejected, so if my section C maths are correct, it will become tax in-efficient after about 3 years(not including AVC's), so will be less attractive to members.

So if CDC doesn't happen, I can't see any other scenario than the RMPP closing completely and everyone going into the existing DC scheme with Scottish Widows from then on. Which will be a completely separate scheme from the RMPP with normal DC pension rules applying to it.

[RobertT]

I thought that bills start in the Commons, it gets read and amendments made before going to the Lords where it gets read and amendments made, going back and forth between the Commons and the Lords until no more amendments are made or the Parliament Act gets used

They can start in either house: https://www.parliament.uk/business/lord ... liament%20(law" onclick="window.open(this.href);return false;).

[stephen500]

I thought that bills start in the Commons, it gets read and amendments made before going to the Lords where it gets read and amendments made, going back and forth between the Commons and the Lords until no more amendments are made or the Parliament Act gets used

Bills can start in either house

[stephen500]

I may be saved by the "bell" for my £750 payment towards "pension advice" as The House of commons recesses (goes on their summer holidays) soon and that will halt the CDC bill in it's tracks.
They are back on Sept 1st and I aim to take my pension on Nov 1st 2020.

recess.jpg

[garnery]

There is a possibilty that DBCBS could amount to more than 25% of NRA 65 fund.
If this is treated like any other money purchase type of pension, for those people that take nra65 benefits & continue working this could mean mpaa is triggered by taking taxable income from a DC scheme? This could limit subsequent contributions to 4k per year. ?
Anyone know for sure?

[RobertT]

There is a possibilty that DBCBS could amount to more than 25% of NRA 65 fund.
If this is treated like any other money purchase type of pension, for those people that take nra65 benefits & continue working this could mean mpaa is triggered by taking taxable income from a DC scheme? This could limit subsequent contributions to 4k per year. ?
Anyone know for sure?

This has got nothing to do with the proposed CDC scheme but, my understanding is that the DBCBS wouldn't trigger the MPAA because it's a DB arrangement – Defined Benefit Cash Balance Scheme.

AVC's(Bonusplan & Flexiplan) are classed as DC and they could trigger the MPAA.

CDC will be classed as a defined contribution / money purchase scheme and could also potentially trigger the MPAA, but as the legislation isn't in place yet we obviously don't know how things are going to pan out for sure.

[RobertT]

The third reading - the final chance for the Lords to change the Bill - took place on 15 July.
The Bill now goes to the Commons for its consideration: https://services.parliament.uk/bills/20 ... hemes.html" onclick="window.open(this.href);return false;

As Parliaments summer recess is due to start next week and last until early September, the next stage, which is the first reading in the Commons, won't happen for at least another 6 weeks from now.

if you ignore the CV-19 hold up, I think it got through the Lords quite quickly. Let's see how long it takes in the Commons.

[stephen500]

The third reading - the final chance for the Lords to change the Bill - took place on 15 July.
The Bill now goes to the Commons for its consideration: https://services.parliament.uk/bills/20 ... hemes.html" onclick="window.open(this.href);return false;

As Parliaments summer recess is due to start next week and last until early September, the next stage, which is the first reading in the Commons, won't happen for at least another 6 weeks from now.

if you ignore the CV-19 hold up, I think it got through the Lords quite quickly. Let's see how long it takes in the Commons.

Hopefully it will get stuck there until the 1st of November! and I am reasonably confident it will not be introduced before I get my pension then, so I can have my £750 pension advice money!!

[RobertT]

Hopefully it will get stuck there until the 1st of November! and I am reasonably confident it will not be introduced before I get my pension then, so I can have my £750 pension advice money!!

There's no danger of the RM CDC scheme being introduced this year. As the link I provided tells you, there's another 7 stages before the pensions bill becomes law.

In my opinion, an April 2021 introduction date is looking possible if things go forward without too much hindrance from now on.

[stephen500]

Hopefully it will get stuck there until the 1st of November! and I am reasonably confident it will not be introduced before I get my pension then, so I can have my £750 pension advice money!!

There's no danger of the RM CDC scheme being introduced this year. As the link I provided tells you, there's another 7 stages before the pensions bill becomes law.

In my opinion, an April 2021 introduction date is looking possible if things go forward without too much hindrance from now on.

The CDC scheme being introduced at the very start of a recession, is that a good thing or not?
I suppose long term, things could only get better. Hope all goes well with the scheme.
Btw, as far as I am aware, this new CDC scheme can see payments of pensions go down in payment, but I have not heard if they can rise in payment?
Is this a good scheme for RM staff?

[RobertT]

The CDC scheme being introduced at the very start of a recession, is that a good thing or not?

Ultimately time will tell, but generally it's a good time to invest when markets are low, plus pension schemes are long term things. From memory you joined RM in your teens or early 20's, you've been paying in for aprox 40 years, you may be drawing your pension for 20-30 years or more. So you could be a member for 60+ years in total.

I suppose long term, things could only get better. Hope all goes well with the scheme.

Hopefully it will, but personally I'm planning on leaving RM in 2023 so don't expect more than 2 years of CDC pension entitlement. Really it's aimed at the younger generation who have no defined benefit provision, such as a final or career average salary scheme.

Btw, as far as I am aware, this new CDC scheme can see payments of pensions go down in payment, but I have not heard if they can rise in payment?

The aim is that it will increase but it's dependent on the investment performance and so could also go down.

Is this a good scheme for RM staff?

RM wanted to put everyone in the DC scheme which is basically just a savings account with options. CDC at least attempts to provide an income for life rather than just a pot of money.

It's a subject that's been discussed many times and there's been many different opinions, but it's probably coming our way relatively soon, so we'll just have to wait and see how it pans out.

[RobertT]

Legislation update: https://services.parliament.uk/bills/20 ... hemes.html" onclick="window.open(this.href);return false;

This Bill is expected to have its second reading debate on a date to be announced.
The Bill completed its House of Lords stages on 15 July 2020 and was presented to the House of Commons on 16 July 2020. This is known as the first reading and there was no debate on the Bill at this stage.

So that's 6 stages down and another 6 to go.

[Woody Guthrie]

Ultimately time will tell, but generally it's a good time to invest when markets are low

That applies to the equity markets, it certainly doesn't apply to the bonds and gilts market which is the main drawback in the CDC scheme, lack of individual control.

How high risk-high return can a CDC pension be? I'm thinking it will be fundamentally risk averse which as you know was the final nail in the coffin of our own DB scheme as post 2008 it jumped the wrong way after the financial crisis and moved far too heavily into bonds. An error that no one ultimately held their hands up for.

I fear the trustees may create a turgid low risk-low return little old lady savings plan that isn't an affective use of the available funds and returns little more than the free money provided by the employer.

[RobertT]

Ultimately time will tell, but generally it's a good time to invest when markets are low

That applies to the equity markets, it certainly doesn't apply to the bonds and gilts market which is the main drawback in the CDC scheme, lack of individual control.

How high risk-high return can a CDC pension be? I'm thinking it will be fundamentally risk averse which as you know was the final nail in the coffin of our own DB scheme as post 2008 it jumped the wrong way after the financial crisis and moved far too heavily into bonds. An error that no one ultimately held their hands up for.

I fear the trustees may create a turgid low risk-low return little old lady savings plan that isn't an affective use of the available funds and returns little more than the free money provided by the employer.

The plan is actually that CDC will be invested largely in 'return seeking assets' which i read as a decent percentage will be in equities! Obviously nothing is set in stone and things might change over time, but the Anticipated CDC design booklet states:

Key Investment Principles

Investment decisions can be considered to be in two tiers, for which the governance structure would be as follows:

1. Split of assets into return-seeking and low-risk assets, which would be determined based on the valuation liability profile as specified in the Section’s Rules in accordance with 3.2 below.

2. Determination of the assets within the return-seeking and low-risk portfolios, which would be determined by the Trustees in conjunction with their Investment adviser in accordance with the mechanism specified in the Section’s Rules summarised in 3.3 below

The CDC Section’s overall split of assets between Return-Seeking Assets and Low-Risk Assets (as defined in Section 3.3 below) is to be calculated based on the Section’s liability maturity profile and using the valuation assumptions. The invested assets backing each Section member’s pension liabilities are to be split as follows:

100% in Return-Seeking Assets supporting pensions for members until age 67,
Switching uniformly from this position over a 23 year time frame to
100% in Low-Risk Assets supporting pensions for members from age 90 onwards.

The Section’s overall split of assets is to be the weighted average of the above holdings for the Section membership. This aggregate approach means that the Section’s investment policy is resilient to structural changes in the membership profile and the RMG workforce.

The above split is that required for invested assets, after excluding any cash holdings required for liquidity as advised as necessary by the Investment Adviser.

The Return-Seeking Asset holdings are to target a good level of returns over the long term, and then the blend to a combination with Low-Risk Assets is to provide more stable support for members’ pensions once in payment.

The Return-Seeking Assets are a diversified growth portfolio, chosen so that:

the expected median level of returns is within a specified margin of that on a diversified global (currency hedged) equity portfolio, and
the volatility of returns is advised by the Trustees’ Investment Adviser to be as low as can reasonably and efficiently be achieved.

The Low-Risk Assets are an appropriate mixture of bonds and other low-risk assets which the Trustees’ Investment Adviser advises carry a ‘low risk’ (to be defined), and have an appropriate duration and nature given the remaining duration and expected level of price inflation linkage of the Section’s liabilities.

Which in my opinion is where CDC falls down, because although equities generally provide growth over the longer term and is good for the scheme as a whole, they can be volatile over the short term.

As our pension entitlement will be revalued each year based on the overall value of the pot and as they'll be limited smoothing of returns, what we accrue and what is paid out to pensioners could vary substantially each year.

The alternative would be a similar investment strategy of the RMPP and go predominantly with bonds, but the long term returns aren't likely to be high enough to pay the liabilities. Therefore the accrual rates would be lower.

It's not perfect, but it's what was agreed between RM and CWU and voted in by the membership and it looks like it's coming our way!

[Woody Guthrie]

As our pension entitlement will be revalued each year based on the overall value of the pot and as they'll be limited smoothing of returns, what we accrue and what is paid out to pensioners could vary substantially each year

That's exactly why I think they will be risk averse, especially in the first 10 years of the scheme and unfortunately if the scheme fairs poorly to start with this could be contagious.

Return seeking does not confer any level of risk, a premium bond is return seeking.

This is fairly new ground as far as pension management is concerned and without the employer liability backup of a DB pension or protection from the PPF this is bound to make trustees nervous and over cautious.

I know we're stuck with it Robert, I'm aware we were left with little choice but I fear for future pension members, not me personally as it will have little overall effect on my pension but it's a far more dangerous pension solution than is being sold to the members, I think with the same level of contributions into a decent DC pension and given the lower life expectancy of manual workers against the national average I think the majority would have a better outcome and more individual control.

It is of course just an opinion but that's how I feel.