What I won’t be buying with my big fat pot

John Ralfe, at a City seminar claimed there was no appetite for CDC either among employers or among members of pension schemes.

Well I disagree; the people I talk to who are not in pensions say they want change- new and better product that doesn’t ask them to become investment experts but provides them with a reliable income in retirement (pension) , effeciently – without disrupting people’s lives.

When you outline CDC it seems to fit the bill

1. It provides a reliable income stream in retirement paid into bank accounts with a minimum of fuss
2. While it doesn’t offer a guarantee that the income won’t fall, it promises a higher target pension than could be achieved from buying an annuity,
3. While it doesn’t offer the flexibility of individual income drawdown, it is cheaper and less hassle and is likely to provide more predictable outcomes.
4. CDC doesn’t need you to employ a financial adviser.
5. CDC can be used both to accumulate and decumulate pension savings (or do one or other)

There are two things in particular that people moan about when quizzed on pensions

1. The experience “at retirement” .

2. The proliferation of small pension pots that people pick up over the years.

The budget freedoms and the Guidance Guarantee (details of which will be published next week) are likely to ease many of the fears people have at retirement. But the project to help people bring their pots together (pot follows member) is still awaiting a solution.

I’ve campaigned for pot follows member for 18 years (when at Eagle Star in 1998 we submitted a proposal for a clearing house to John Denham – the then minister for pensions).

It won’t happen without cost. As with moving house, moving pensions triggers all kinds of costs equivalent to those of  conveyancing. Whether these are picked up by the ceding arrangement, the new arrangement or charged directly to the member, these costs are real and will ultimately be met from the fund (one way or other).

The NAPF wanted a series of super trusts to receive the monies, a solution initially rejected by the DWP in favour of the pot follows member idea where your last pot is transferred to your next pot till you have “one big fat pot” at retirement.

But this solution preceded the decision to press ahead with CDC. CDC schemes need to be huge to work and they need assets up front. So far it has been assumed that they will only work with a big fat sponsoring employer behind them or a master trust bringing together a number of smaller employers.

The idea that a CDC scheme could be set up just to receive transfers from small pots has not got much airplay (so far) but it ticks all the boxes. CDC is the super trust that the NAPF demanded.

1. CDC’s major strengths come into play post retirement, they can provide reliable smoothed income streams through the pooling of investments and they can insure longevity through pooling of risk. So transferring small accumulated pots into a superfat CDC pot at retirement makes a lot of sense
2. The providers of pension savings are not best placed to provide a mass market alternative to annuities. Frankly they aren’t good at pension payrolls and they aren’t showing much appetite to build mass market decumulation product.
3. CDC schemes are likely to be huge and we don’t expect to see many of them, they’ll be super-governed and accreditable with a “pot-follows-member” kite mark
4. CDC could be the safe haven product into which pots can be tipped without having to have complex advice- they are the game changer the public need to take action.

There are around 100m small pension pots in the UK. Some of them are very well managed with low charges and sound investment strategies. But most of them malinger in legacy arrangement with high charges, un-managed investments and provide poor information to the member.

The majority of the estimated £350 bn in these arrangements is ripe for transfer if only a good home could be found for it and if only the “conveyancing” costs can  be minimised. No doubt there will be advisers who will point out that some of the £350bn cannot be transferred carrying guarantees that should not be lost.

Tom McPhail and PASA have put forward a passport system which would deny safe passage to pots which carry such guarantees but give free passage to the bulk of the money.

Pot follows member is a good idea with no obvious means of execution. The long-term future for PFM is the system of Collective Defined Contribution that is currently being legislated for.

John Ralfe is right to ask whether there is a need for CDC. I hope that CDC will get traction both as an accumulation and decumulation vehicle, but I know it would get popular support as a means of bringing together DC pots and paying them back to members  collectively.

This post was first published at http://www.pensionplaypen.com/top-thinking