Suggestion: National Infrastructure Fund DB Pension

LHW99

It's an easier problem to admire from a distance than actually to engage with solving over a couple of decades plus.

And pretty impossible on a 5-year Government horizon

Universidad

michaels said:

in theory there are long term infrastructure investment in regulated sectors (such as water) which are in theory due to the low risk nature of the investment capped to fixed inflation adjustment return on capital - exactly the sort of assets that would match the pension liabilities. 

USS has lost the best part of a billion pounds on Thames Water in the last few years, and all it has in return is the reputational damage of being one of the "greedy shareholders" who wants to double water rates so they can keep taking dividends. 

Of course the "greedy shareholders" have long since run away and left USS holding the bag - they've never had a dividend. It has all been losses. It certainly seems like it has been a bad few years for investing in "safe" assets.

Andy_L

why would the government want to give investors a better return than they currently offer on the various NS&I products?

hyubh

gm0 said:

Any scheme needs to have the members goals at the heart of it.  And be arms length run.  And actually - it should not be DB at all.

Likely it should be defined ambition.  Smoothed. Death pooled.  With profits.  DC+.   Known inputs at the time of employment.  No open ended indexation promises. Some underpinning of "the pension you will get" And a variable portion linked to pooled investment returns.

While I'm sure the actuarial profession would love that, I'm not sure what's in it for the individual saver vs. straight DC. No DB promise, less than pure DC flexibility.

hyubh

Universidad said:

michaels said:

in theory there are long term infrastructure investment in regulated sectors (such as water) which are in theory due to the low risk nature of the investment capped to fixed inflation adjustment return on capital - exactly the sort of assets that would match the pension liabilities. 

USS has lost the best part of a billion pounds on Thames Water in the last few years, and all it has in return is the reputational damage of being one of the "greedy shareholders" who wants to double water rates so they can keep taking dividends. 

Of course the "greedy shareholders" have long since run away and left USS holding the bag - they've never had a dividend. It has all been losses. It certainly seems like it has been a bad few years for investing in "safe" assets.

The USS' fund managers knew what they were buying - the USS wasn't forced to invest in Thames Water. Ergo the losses are 'deserved', insofar as any freely made investment loss or gain is 'deserved'.

gm0

hyubh said:

gm0 said:

Any scheme needs to have the members goals at the heart of it.  And be arms length run.  And actually - it should not be DB at all.

Likely it should be defined ambition.  Smoothed. Death pooled.  With profits.  DC+.   Known inputs at the time of employment.  No open ended indexation promises. Some underpinning of "the pension you will get" And a variable portion linked to pooled investment returns.

While I'm sure the actuarial profession would love that, I'm not sure what's in it for the individual saver vs. straight DC. No DB promise, less than pure DC flexibility.

Au contraire - many benefits to a wide range of individuals.  Not to large DC pot holders confident to manage investments with an eye on the current IHT workaraound to pass some of their wealth to heirs.

The key combination for DA/DC+ is pooled DC with smoothing of returns.  Limited inheritance. Death pool

So for the pensioner

+ Cannot out live it (deathpooling like an annuity)
+ Pension has a floor on it and a "profits" element - losses are capped
+ Simple - don't have to manage drawdown or investments as an individual

- You could add sequence smoothing (no more being the 1% unlucky cohort retirement start date - slightly less bad)

- Lower drag on investments from investment management and DC platforms and pots and advisers.  All gone.
- High volume deals for fund management (lower costs)

The death of a chunk of retail financial services has some tax take implications but in general I am still very much in favour of it being vaporised by an arms length from government, national, pooled scheme.

For the employer

- Fixed costs at the time of employment - no overhang liability as with funding ratio on DB.  Because it's DC.

It's not intended as a solution for the international rich.  SIPPS would likely still exist.  And SSAS (families, farms etc). 
The investment savvy or those who would prefer to self manage their investments will not want to opt in.
It's for the regular people in employment - who have small DC pots now.  Who don't know how to manage them.  And half of whom are in the advice gap where they are beneath the economic threshold where advisers can feasibly help

The challenge for those that think this idea is a poor approach to address limitations of current individual DC drawdown.  Is to come up with something else that improves on it.  For the mass market. 

FCA did think about "compulsory advice" and progressive fee structures to help with the advice gap.  I imagine many independent minded large DC SIPP users would hate that idea even more than this one.

No need to worry.  Little chance of it becoming airborne beyond the small post office pilot.

Universidad

hyubh said:

The USS' fund managers knew what they were buying - the USS wasn't forced to invest in Thames Water. Ergo the losses are 'deserved', insofar as any freely made investment loss or gain is 'deserved'.

No argument here. It was a bad investment by any measure. I do take some issue with the public perception that they've had their undeserved dividends and now it's time to pay back in. It's a phenomenal loss, when they were trying to invest in something reliable. It is, of course, entirely on them that they invested in something that had already been stripped to the bone.

gm0

This neatly illustrates.  Again.  That Regulatory risk is dominant. 

Government sets the boundaries of the game for Ofwat (or whoever for national infrastructure) what it does and does not regard as "acceptable" politically which sets revenues and caps ROIC (which also depends on cost expansion of delivering the project).

Government decide that alternative sources of capital (not from direct government borrowing are good sources of capital investment in infrastructure renewal (which they are).  They free up space for more short term politically salient action or spending bloat during inaction - within the "truss" limit (of borrowing behaviour.

Government later decides consumer cost of living is important and consumer bills or levies need to be capped and rise more slowly (which indeed is important.  ROIC falls.  Cashflows are disappointing and below plan.  Schemes funding ratios drop.  DC investors in any patriotic fund version have poor returns vs simple alternatives.

Government do not however feel obliged to look after the sheep they previously herded into the "invest in UK infrastructure pen".  While the lure of stable regulated infrastructure cashflows and returns seems well matched to pension scheme cashflows - it turns out to in fact be "bait and switch".

The fact that something has to give ultimately is a problem for the poor pension scheme members who are herded into a doomed investment.  The government (correctly) for its own incentives does not really want to explain to consumer voters why it is bailing something more complex out - with a more diffuse and long term voter base attached.  The DB funding issue can be managed into the future - for a spell - past the election.

This is not a complete explanation of Thames.  Banditry also relevant.   Subject to a load of egregious financial engineering / gaming etc.  For decades.  It's network and capital plans to remediate were a total mess 30 years ago.

But highly relevant to sparkly plans for a new scheme from Reeves.  DC Pension schemes can be compelled to "offer" an option.  But DB compelled to invest a %.   Ruggered the bursar ?  what did they do to deserve this.  Rebellion and resistance to the extent trust law allows seems entirely justified.  Let the lawfare commence.

Ofwat have for a long time borne down hard on the capital programs and ROIC and have had a recent damascene conversion that a lot of money now needs to be spent.

The pressure on the returns from infrastructure build out are also partly external pressure.  But costs of projects rise due to energy and other supply chain events or employment costs due to other government good ideas.  And of course the lawfare that accompanies all planning.  The London diverter being a good example of making something more difficult than it need be - so that nimbys can weaponise environment study lawfare. 

hyubh

gm0 said:

hyubh said:

gm0 said:

Any scheme needs to have the members goals at the heart of it.  And be arms length run.  And actually - it should not be DB at all.

Likely it should be defined ambition.  Smoothed. Death pooled.  With profits.  DC+.   Known inputs at the time of employment.  No open ended indexation promises. Some underpinning of "the pension you will get" And a variable portion linked to pooled investment returns.

While I'm sure the actuarial profession would love that, I'm not sure what's in it for the individual saver vs. straight DC. No DB promise, less than pure DC flexibility.

Au contraire - many benefits to a wide range of individuals.  Not to large DC pot holders confident to manage investments with an eye on the current IHT workaraound to pass some of their wealth to heirs.

The key combination for DA/DC+ is pooled DC with smoothing of returns.  Limited inheritance. Death pool

So for the pensioner

+ Cannot out live it (deathpooling like an annuity)
+ Pension has a floor on it and a "profits" element - losses are capped

- The potential for younger workers realising that the crypto-DB messaging was all a con when, 40 years after joining, they are forced to take an annuity a lot lower than had been previously projected (and had been previously been enjoyed by older workers retiring). And despite that, finding out it's still possible for their pension in payment to reduce if a funding gap re-emerges.

While you can emphasise clever-clever investment strategies and the potential for cost reductions due to scale (although, don't mastertrusts like NEST already enjoy those...?), ultimately the key thing about CDC is that there's no actual guarantee. Words like 'pooling' and 'smoothing of returns' can easily become euphemisms for this - risk isn't abolished, it's just shuffled around.

+ Simple - don't have to manage drawdown or investments as an individual

Only a small minority of people actually do that now - most just leave their occupational DC pension in the default lifestyle fund. Workplace DC for the employee is only complex if you want it to be.

- Lower drag on investments from investment management and DC platforms and pots and advisers.  All gone.

Most people with an existing DC workplace pension aren't involved in any of that outside of the point of retirement. Are you suggesting the introduction of DC would require abolishing personal pensions? I'm genuinely confused at your point here.

The death of a chunk of retail financial services has some tax take implications

???

For the employer

- Fixed costs at the time of employment - no overhang liability as with funding ratio on DB.  Because it's DC.

Exactly, no benefit compared to the current situation.

It's not intended as a solution for the international rich. SIPPS would likely still exist.  And SSAS (families, farms etc). 

We're talking about occupational schemes for employees. Not sure what 'the international rich' and personal pensions have to do with that...?

The challenge for those that think this idea is a poor approach to address limitations of current individual DC drawdown.

No, the challenge is for CDC blue sky thinkers to explain what they think the 'limitations of current individual DC drawdown' are, why they are a truly bad thing, and why CDC would be a better alternative and be possible to introduce. You seem to be wanting CDC to be the default position to argue against (hence the claim that CDC would be good for employers) - but the actual default is what we have currently.

FCA did think about "compulsory advice" and progressive fee structures to help with the advice gap.  I imagine many independent minded large DC SIPP users would hate that idea even more than this one.

The 'international rich' again... I genuinely don't see them as relevant. The question is whether CDC would be an firm improvement for employees auto-enroled into existing DC mastertrusts.

No need to worry.

Well on a personal level, I work in pensions, mostly on DB schemes. Structural change in occupational pensions, especially towards a quasi DB model, would likely be good for me professionally. So on second thoughts, I take it all back - more power to your elbow

LHW99

And of course there is nothing so bad that Government interference can't make worse.