For the last few months, the RSA has bought together key pensions experts to discuss the best to way to implement CDC pensions - a new type of pension we’ve been championing for over a decade.
This has been a process of collaboration to find common ground between the often-disparate views expressed. I’ve been thinking about the process we undertook and what it means for the bigger, more difficult conversations we need to have about our economy.
The Pensions Challenge
The challenge with pensions is clear for all to see. With a steadily ageing population, it is increasingly clear that existing pensions will not be able to deliver on their promise of an income in retirement.
Pension pots set up to fill Defined Benefit (DB) schemes, which guarantee a pension linked to workers' salaries, are increasingly stretched by the rapidly decreasing worker:retiree ratio. This is placing an unsustainable strain on workers currently paying into that pot.
To counteract this, organisations have begun to offer workers a Defined Contribution (DC) scheme. This is where both the employer and the employee pay into a pot of money that, on retirement, will be the employee’s responsibility. Some choose to buy an annuity (an annual pension payment), but these are expensive and a poor investment if you die young.
If you try to budget from your existing pension pot, you may find yourself gambling on your life expectancy, a pastime beyond surely even the most morbid speculator.
DB pensions are unsustainable with our current demography.
DC pensions are difficult to understand, difficult to budget for and expensive for the employee.
Why We Need CDC Pensions
That is why the RSA has been thinking about CDC pensions. Our interest in this model began over ten years ago, following the work of the RSA's Tomorrow's Investor programme.
CDC pension schemes guarantee an income for all until death.
The appeal of CDC pensions is their logical simplicity. With enough people pooling their wealth, pension pots can guarantee an income to all participants for life.
Here’s how they work: CDC pensions are all about sharing ‘longevity risk’ between participants. Workers put their money into a pension pot, pooling their cash with other workers. Retirees will then be paid out of this pot. The unused contributions of those who die younger will help pay for those who live longer, making sure all participants are guaranteed an income until they die.
Key here is that these schemes work for both employers and employers. They pay 30 percent more to workers than a DC scheme, whilst removing many of employer’s concerns about the long-term viability of DB schemes.
For an even simpler explanation, read David Pitt Watson and Harinder Mann’s simple illustrative example on exactly why CDCs make sense.
Unions and Employers, Labour and Conservatives working together with the RSA
A fascinating element of this project is the people involved. It began as a partnership between the RSA, the Royal Mail, and the Communications Workers Union to find a pensions solution for both employers and workers.
Terry Pullinger, Postal Deputy General Secretary for the CWU, said that although workers may be losing their DB pensions, CDC introduces “a tangible solution for 141,000 decent working people, that provides genuine hope for an occupational wage in retirement pension running alongside their state pension.”
The partnership was perhaps best exemplified by a comment at one of our events, where a participant said they’d "never come across a situation where a company and a union are so committed to ensuring an outcome together".
In the very first roundtable convened by the RSA, representatives from both the Conservative Party (Guy Opperman MP) and Labour Party (Jack Dromey MP) expressed their support for exploring the CDC option - cross-party agreement which seems increasingly rare in our polarised age.
We’ve unearthed other areas of agreement.
The CDC Forum launched with an open debate of experts. Lifetime critics of CDC pensions sat alongside dyed-in-the-wool advocates. When brought together, they discovered that the differences between them were not so vast, and that the points of agreement far outweighed the points of outright disagreement.
Finally, we hosted a 60-person strong roundtable of lawyers, actuaries, and pension policy pros. It was an opportunity for everyone to discuss their thoughts, concerns, new ideas and unanswered questions in the lead up to the government’s CDC pensions consultation.
The importance of an open process to build consensus
The most important thing that everyone agreed on was that looking out for retired people should be the number one priority of pension policy.
The RSA CDC Pensions Forum has recognised this as the jumping off point for all conversations, and I believe our impact has been driven in part by the Forum’s insistence on a consensual approach.
The end result of this process, the RSA’s Consultation Response, reflects the variety of thought throughout our conversations. Our open process means our recommendations to government – on communication, governance and investment – are built on evidence and compromise.
We hope this will lead to the successful introduction of a pension policy that stands to benefit the employees of Royal Mail straight away, but perhaps eventually the whole UK.
The word ‘forum’ comes from the Ancient Roman public spaces where citizens would gather to discuss justice, philosophy, and business. The Republican Forum in Rome was a place where all opinions were welcomed, and where democracy and society were driven forward by considering issues from every standpoint.
Our Forum has explored not just a much-needed solution to one of the greatest challenges of our time, but also a way to open conversation wide to a variety of viewpoints. If we can collaborate with one another to reason our way to a better future for pensioners, there are surely lessons to be learned for how to talk to each other about the other big polarising policy issues of our time.
Read the RSA's CDC consultation response