Prepared by Aon Hewitt / Slaughter and May/ First Actuarial TUC Pensions Conference 21 January 2015...

Prepared by Aon Hewitt / Slaughter and May/ First Actuarial

TUC Pensions Conference

21 January 2015

What does CDC mean for a Trustee?Kevin Wesbroom / Sandy Maudgil / Hilary Salt

2The ABC of CDC 21 January 2015

What women (and men) want:

Q: Which best describes your attitude to how you might spend your pension fund?

Q: When you retire, how do you think you will use your pension fund?


What is a Collective DC plan?

The employer pays a fixed contribution rate

The member gets a DB-like Target Pension– pension paid from the plan– revaluation and indexation to preserve real value

No individual accounts

No member decisions on investments

No member decision on decumulation

We can “square the circle” – the Target Pension is not guaranteed– benefits adjusted to ensure cost stays constant– indexation and revaluation is not guaranteed– even the basic pension is not guaranteed in extremis


Collective DC Designs – Single Employer example

Target Pension could be conventional DB design – eg CARE– Or could be Pension Purchase approach (DC style)

1% CARE plan payable from State Pension Age– CPI indexation pre and post retirement targeted– Cost neutral early or late retirement terms– Single life pension – can convert to contingent spouse’s

Employer cost – set at 10% of pay

Rules needed for changes to Target Pensions and new benefit accrual

Example: funding level kept within a window of 90% - 110% by adjusting (in order):

i. Revaluation target – and this year’s increase to Target Pension – set at (100+x)% of CPI

ii. One-off benefit cut applied to all Target Pensions, including those in payment


Collective DC - the selling points

• Bigger, more stable outcomes on average• Avoid opportunity cost of annuity purchase (= lower yielding asset) at potentially

inappropriate time• No daily dealing – so can use illiquids like infrastructure• Time horizon of the group, not the member

• Trustee decisions – not members• Where to invest• How to create a retirement income• How not to outlive your savings with new Budget flexibilities

• Better returns?• Professional advice• Without consent

• Remember DB before every company car had to be a Rolls Royce … ?


Modelling - Historic Outcomes

Retirement after 25 years


Modelling - Predictability

Variability of project pension for 2011 retirements


Modelling – Absolute Level of Benefit Increases

Combined effect of historic adjustments which our hypothetical 1% CARE scheme would have made over time


The Perfect Pension Plan?

CDC Pension PlanCDC Pension PlanAll paid by employer (12%)All pension - no commutation Solid reliable base for pension planningView Target Pension online anytimeAnnual statement and confirmation of Target Pension amount

Retirement Spending AccountRetirement Spending AccountYour personal contributions (4%)Invested for long term savingAccessible from 55 onwardsFull freedom to decide on drawdownTax free savings, tax free roll up, largely tax free drawdown

PLUS


Legal Issues

From employer perspective:– Key issue is to be clear that this is a collective benefit scheme and not a

DB scheme– Need to be sure that members are not being misled. This is a DC plan

but (hopefully) without the investment inefficiences associated with individualism.

From member perspective:– What is this "collective benefit" thing?– Can I trust it?– How do I know you're not just ripping me off?

Governance is key. Trustees holding the line …


A lot like a DB scheme …

Trustees

Employer MembersAgreement to provide scheme

Benefit paym

ents, other dutiesCon

tribu

tions C

ontributions


Key Duties of Trustees under CDC

DB: Trust Deed/Employer sets out the benefits, and Trustees decide how much Employers need to pay.

DC: Trust Deed/Employer says how employers will pay, and members get what they get.

CDC: Trust Deed/Employer says how much employers will pay, and Trustees need to work out a "target" benefit ...

Pension Schemes Bill requires Trustees to:– set a target benefit at a level which ensures probability of target being met is within

a specified range– decide the investment strategy– owe members a non-excludable duty of care (more important than normal DB?

risk all sits with member)– determine policy regarding "deficit" or "surplus" (inter-generational fairness?)– determine any transfer in/transfer out policy ("gaming the system"?)– communicate a wholly new concept to a membership that may already be

confused …


CDC as an alternative to DB (DB-)

Focus is on a target benefit outcome

Might build up a funding reserve or cushion so benefit can be maintained

Suitable for-one employer – perhaps replacing db scheme

-Schemes with employer contributions (so cross subsidies acceptable)

Trustee RoleSimilar to that of current DB scheme trustee – especially

on fundingGreater role in communications

All members get the same accrual rate and the intention is that this remains stable


CDC as an alternative to DC (DC+)

Focus is on a fixed contribution

Planning on a best estimate basis with no intention to build up reserves

Suitable for-Lots of employers or no employer

-De-cumulation vehicle

Trustee RoleMaster trust type trustee role

Role much more pivotal and demanding

Members receive a target pension that varies with age and market conditionsChanges in the target expected


Questions for a CDC Trustee: Funding

Vary the pension – so reduce £10,000 pa pension to £9,000 pa

Vary the pension increases – reduce from inflation to (inflation -1%) pa

Use a bonus declaration and first make any reductions to bonus

Regular Contributions

Regular Contributions

One off Contrib-utions

One off Contrib-utions

Investment Returns

Pension with increases




Expenses

Planning Valuation discloses a 10% deficit


Questions for a CDC Trustee: Communications

Your target pension is £1,000 per monthThere is a 50% chance you will get

more than this and a 50% chance you’ll get less than this

There’s only a 50% chance I’ll get what you are promising me!

Thanks but no thanks!


Questions for a CDC Trustee: Communications

There’s a 95% chance you’ll get at least £700 per month

from the scheme

So I’m guaranteed to get £700 per month. But that’s less than

Scheme A were offering


Key Issues for CDC trustees

Investment Strategy

The Planning Exercise

Member Comms

Expenses

Members have to trust the

trustees

and the scheme actuary!


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Prepared by Aon Hewitt / Slaughter and May/ First Actuarial TUC Pensions Conference 21 January 2015...

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