TUC Pensions Conference 21 January 2015 What does CDC mean for a Trustee? Kevin Wesbroom / Sandy Maudgil / Hilary Salt Can be a L1A, L1B, L1C or L2 image The image needs to be cropped within the current window specs Try to use the same categories of images in your various divider slides (i.e. all L2) A library of L1C and L2 images are available for use. If you wish to use an L1A or L1B image, these will need to be created through a designer who has access to Adobe Creative Suite. TUC Pensions Conference 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): Revaluation target – and this year’s increase to Target Pension – set at (100+x)% of CPI 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? PLUS CDC Pension Plan All paid by employer (12%) All pension - no commutation Solid reliable base for pension planning View Target Pension online anytime Annual statement and confirmation of Target Pension amount Retirement Spending Account Your personal contributions (4%) Invested for long term saving Accessible from 55 onwards Full freedom to decide on drawdown Tax free savings, tax free roll up, largely tax free drawdown

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 …

Benefit payments, other duties Agreement to provide scheme A lot like a DB scheme … Trustees Contributions Contributions Benefit payments, other duties Employer Members Agreement to provide scheme

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 All members get the same accrual rate and the intention is that this remains stable 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 Role Similar to that of current DB scheme trustee – especially on funding Greater role in communications

CDC as an alternative to DC (DC+) Focus is on a fixed contribution Members receive a target pension that varies with age and market conditions Changes in the target expected 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 Role Master trust type trustee role Role much more pivotal and demanding

Questions for a CDC Trustee: Funding Regular Contributions One off Contrib- utions Investment Returns Pension with increases Expenses 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 Planning Valuation discloses a 10% deficit

Questions for a CDC Trustee: Communications Your target pension is £1,000 per month There 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 Member Comms Expenses The Planning Exercise Members have to trust the trustees and the scheme actuary!

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