To what problem is the Collective Defined Contribution scheme the solution, exactly? It certainly won’t save  the defined benefit scheme, now on the brink of extinction thanks to successive governments and actuarial paranoia. It’s incompatible with George Osborne’s Budget move which scrapped compulsory annuities. It’s not even obviously much cheaper, as insurers are cutting their management charges for new schemes.

Defined contribution schemes produce miserable pensions when long-term interest rates are low, as now. In theory, CDC shcmes would have no guarantee, the word that has generated the paranoia among the actuaries, and forced schemes into “risk-free” bonds instead of their natural long-term investments of stocks and shares.

However, a CDC requires that all the members are liable for ensuring solvency. This must include the pensioners themselves, or it will turn into another tax on the current generation of workers to the benefit of the previous one, like National Insurance. The liability means that pension payments during retirement could be cut, including to those pensioners who had been obliged to join a workplace pension scheme under the last government’s change of rules.

Actually imposing a cut promises to be so unpopular that administrators would be desperate to avoid it. The very thought would trigger the actuarial caution, pushing the funds into buying the same lousy-value bonds as existing schemes.Then there are the valuation problems of employees switching from one collective scheme to another, where working out a “fair” transfer value is little better than guesswork.

The complexity and practical difficulties of this proposal are enough to ensure that few employers will want to go anywhere near it. Fortunately, they won’t have to, since it has no chance of ever becoming law. So the answer to the question above is simple, after all: the CDC scheme solves the problem of the need to be doing something at the Department of Work and Pensions in the dying days of the coalition. It seems to have succeeded.

Up like a Rock(et)

When Northern Rock Asset Management offered to redeem the rescued bank’s 12.625 per cent perpetual subordinated notes for £33 per £100 in 2010, the management made things sound so bad that most of us holders smelled a rat and declined the offer.

This week NRAM produced another set of impressive results, showing that it’s repaying its debt to society (aka the taxpayer) and shrinking to fit its new modest status. Arrears are falling. Overwhelmingly, its borrowers are continuing to pay, even those who took Northern Rock’s crazy offer of 125 per cent mortgages at the height of the boom and are still in negative equity.

Underlying profits at NRAM were up from £876m to £1.160bn for the latest 15 months, and reserves are now up to 8.8 per cent of assets. This sunny picture would quickly darken if interest rates rose significantly, but each month that passes with low rates builds more buffers against defaults.

Which brings us back to the £125m of bottom-of-the-heap debt. The unpaid, accrued interest is now £72m, which shows the magic of rolling-up interest. The 12.625 per cents are up to £104, which shows the value of patience. One day, NRAM will either have to pay up (and keep doing so) or make us an offer that this time we really can’t refuse.

In case it’s Yquem

Trading in the Luxembourg-based Nobles Cru wine fund was suspended a year ago, and if the claim of “lack of liquidity” was some sort of wry joke, the investors didn’t get it. However, as FTFM revealed last week, some holders have traded, selling out at a 28 per cent discount to book value to a mystery buyer, who then swapped his holding for wine with a notional value of E37.7m from the portfolio.

Understandably, other holders are sniffing this deal suspiciously, arguing that Luxembourg’s financial watchdog should have tasted it first. Valuing fine wines is an inexact science, and Nobles Cru has endured some distinctly corked comments in the past. It denies cherry-picking by the buyer and claims the deal left a “similar level of diversification” in the remaining E50.8m fund. The watchdog declines to comment on individual cases. Of wine?

This is my FT column from Saturday

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