The Great Risk Transfer Campaign
While England, Scotland and Wales are currently focussed on tomorrow’s elections, The IFoA (Institute and Faculty of Actuaries) have identified a major long term issue within the UK, Outside the private sector, a decreasing proportion of the working population have secure employment. Pension plans are becoming overwhelmingly DC (defined contribution a.k.a. money purchase) instead of DB (defined benefit a.k.a. final salary). This means that any poor investment performance reduces people’s retirement benefits instead of increasing employers’ contributions. Risk is progressively being transferred from employer to worker.
We hear parts of the story from parts of the media, but only the IFoA appear to have grasped the overall issue. Also it is amazing that the Labour Party and trades unions are not talking about “the great risk transfer”. The IFoA’s main focus is on public information and education and they rightly feel that they have a significant role to play. There’s more on https://www.theactuary.com/ifoa/2021/03/30/ifoa-campaign-great-risk-transfer?utm_source=Adestra&utm_medium=email&utm_term= where their former president John Taylor writes in The Actuary.
There is, however, part of the article with which I strongly disagree. He supports CDC pension plans and writes as follows.
“In collective defined contribution (CDC) pension schemes, members pool their retirement savings into a single fund and share the risks associated with investment performance and longevity. This risk sharing allows the scheme to invest in assets with higher expected returns than individual DC schemes can. Employer contributions are fixed, so pension levels will vary - and may be lower in some years. However, risk sharing allows schemes to smooth market volatility and thus achieve fairly stable pension levels.” “As part of the campaign, we are seeking government action to show employers that CDC schemes are an attractive alternative to DC schemes.”
Did you notice that John Taylor said that a CDC pension can actually reduce during payment? It really can and this possibility must be spelt out very clearly in advance or there will be genuine grievances in future years.
The IFoA would do better to look at the Dynamic Pension system used by the Provident Mutual (now part of Aviva) in the 1990s and earlier. Dynamic Pensions were with profit arrangements with annual bonuses based on investment performance and other factors. There was no promise that the level of pensions would increase, but they could not actually fall.
