The ABI’s 10 problems with CDC – with 10 answers!

con-keating-230x230Dail Mail Annuity

The ABI have 10 problems with Steve Webb’s collective DC plan, articulated as follows by Huw Davies , their  Director of Policy.

As usual his is a constructive  outcome focussed argument as you’d expect  from an organisation devoted to making the lot of Britain’s pensioners better at the expense of their long-suffering insurers (who provide annuities pretty well pro-bono).

“Another day, another plan to ‘reform’ the UK pensions market. At this rate, it is going to be a very long 15 months to the 2015 General Election.

The latest idea to excite the papers is pensions minister Steve Webb’s promotion of Dutch-style ‘collective defined contribution’ pension schemes – or ‘CDC’ to the pensions and think-tank world to whom it has hitherto been almost exclusively known.

After supportive write-ups in the Daily Mirror and Daily Mail yesterday, CDC – or at least its alleged benefits – is now a bit more familiar. With shadow pensions minister Gregg McClymont a fan and Ed Miliband’s favourite think-tank the IPPR also coming in out favour of ‘going Dutch’ it is time for those of us a little more sceptical about CDC to speak up.

Here are 10 points everyone should understand about CDC:

1.     CDC does not guarantee higher retirement income

CDC’s fan club repeatedly state that it could deliver higher pension income than workplace GPP schemes. But CDC schemes are no more immune to lower than expected investment returns than other pension schemes. The Dutch system has recently seen unilateral cuts in the level of benefits paid. By April 2013, two million active members, a million pensioners and more than two million deferred members in The Netherlands had faced a reduction in benefits.

2.     CDC can hit the young

CDC schemes work by sharing risks between all members, pooling the investment in one fund. This brings down overheads but involves transferring risks from old to young, with younger scheme members bearing the risk of reduced future payouts to ensure the benefits of older members are preserved. That is why the youth wings of three major Dutch political parties recently agreed a cross-party campaign to ditch the Dutch model and move to a UK-style system of individual pension plans.

3.     CDC would require UK pension savers to give up their current rights

Under CDC there are very limited options for a saver to choose the contribution level, risk profile or investment strategy. Everyone is treated the same as a ‘collective entity’ not as a group of individuals. This is similar to the ‘with-profits’ model which is disliked by UK regulators for the lack of transparency it affords the individual.

4.     CDC requires a collective labour market

Unless the Daily Mail has had a Damascene conversion to collectivised labour markets, it may want to look more closely at CDC. CDCs in The Netherlands are built on the collective model of employers, unions and employees agreeing all major labour market decisions together. CDCs are heavily unionised with senior union officials having more say over how an individual’s contributions are invested than the employee.

5.     CDCs are regressive. It is puzzling that so many on the centre-left of British politics are fans of such an obviously regressive system. In CDC schemes, low-earners, who tend to have below-average life expectancy, subsidise the high earners who tend to live longer. Unlike in the UK, there is no scope for those with low life expectancy (often the poorest) to receive higher retirement income through enhanced or impaired annuities.

6.     CDC schemes are less transparent and more complicated than UK workplace schemes

The UK pension debate in recent years has – rightly – focused on the need for greater transparency and simplicity, especially in workplace schemes used for auto-enrolment. Yet CDC schemes are notoriously opaque and complicated, with members unable to be certain how the total pot will be distributed and its risks managed, a key concern for UK regulators in recent years.

7.     CDCs increase the risks of market concentration

For CDC schemes to work economically, they need scale; to be as big as possible. Yet for pensioners, very large pension schemes carry risks as well as cost savings; a strategic mistake by the trustees, actuaries or investment managers would have an impact on a much bigger number of savers than those saving through a UK-style Group Pension Plan. If CDCs begin but do not grow significantly as Steve Webb has alluded to, it will be difficult for them to achieve economies of scale to deliver their promises of lower costs and better investment returns.

8.     CDCs place much greater burdens on employers

With CDCs employers not only need a collectivised bargaining structure (see above) they also have to take a much greater role in explaining to employees the choices they face, including the fact that future project retirement incomes may not be delivered. At the moment, employers need only facilitate their workers joining a GPP and even that has been a monumental struggle in some places.

9.     CDCs will need someone to guarantee outcomes

As John Ralfe has pointed out, CDCs rely on a higher proportion of equity holding than normal DC schemes to deliver the returns its advocates promise. Yet the cost of insuring against underperformance will rise over the option period, meaning a guarantee will typically be needed from an investment bank, insurance company or government to reassure savers that they are not entirely in the hands of the long-term equity markets.

10.  CDC would take a generation to introduce

Deciding the future shape of the UK pensions system is not like playing Lego – it can’t be taken down and rebuilt every day to suit the whim of the moment. Pension systems tend to reflect the long-standing cultural preferences of the society they operate in which is why the UK now has a largely individualistic system (replacing the more collectivist post-war DB model) while our Dutch neighbours have traditionally had CDC reflecting its highly collectivised labour market and employment model.  If we understand this, it should make us even more wary of assuming that any transition to such a radically different model would be anything other than hugely time-consuming, counter-cultural, opposed by regulators and potentially oversold by politicians needing to demonstrate ‘vision’ or another ‘silver bullet’.

There is still much to be done to build confidence in the UK pension system and UK workers need to continue to be encouraged and incentivised to save more and save longer for their retirement. We in the pensions industry have more to do too.

But raising false hopes that if we all go Dutch, the Land of Milk and Honey awaits is as misleading as it is irresponsible. It is certainly not what many people in The Netherlands think about their system.

Let’s concentrate instead on making the current reforms work effectively for employees and employers to deliver good retirement outcomes from low-charging workplace schemes.


And now for comments from Dr Con Keating ; Con is a bolshy person who for some reason is consulted by the Bank of England among others on a variety of economic matters. Con does not represent the annuity providers and is an independent free spirit.

We should be very wary of such a man as he is a subversive. Were he living in a less enlightened country he would be interned for regularly being right in a most unpleasant way

Here his a response to the 10 points raised by the ABI against CDC:

1.     CDC does not guarantee higher retirement income

This is a half-truth as presented. CDC does not guarantee  higher retirement income but     given its greater efficiency, it is reasonable to expect higher retirement  incomes of average. Contrary to the ABI’s  innuendo, no, repeat no, CDC scheme has cut benefits. The pensioners and  deferred members who experienced cuts were in fact all in legacy defined benefit schemes.

2.     CDC can hit the young

In fact, the risk sharing among members means that the young will benefit  relative to the old when real returns are low as  they have been for the past decade  or more and are widely projected to be for the foreseeable future.

There is no definition of future  income in an uninsured CDC scheme, that  is a property of defined benefit arrangements  and these are the scheme types to which the youth wings object.

3.     CDC  would require UK pension savers to give up  their current rights

A CDC system can  have as much choice over contribution levels as  in individual DC. The  collective nature of the risk profile and  investment strategy make this far more efficient than individual saving for all other than those odd individuals lucky    enough to have produced stellar investment returns.

4.     CDC  requires a collective labour market

It does not – most  Dutch CDC schemes are single employer.

The author has confused CDC with Dutch industry-wide Defined Benefit schemes. It is simply  untrue that most CDCs are heavily unionised.

5.     CDCs are regressive. 

This is simply untrue. CDC can maintain all of the annuitisation options of individual DC, but such an open market option   is usually not competitive.

6.     CDC schemes are less transparent and more complicated than UK workplace schemes

This assertion  requires some evidence to support it.

7.     CDCs  increase the risks of market concentration

It is not true that CDC schemes need to be as big as possible to “work  conomically” – they need merely to exhibit diversity of membership.

8.     CDCs place much greater burdens on employers

CDCs do not need a  collectivised bargaining structure and many  sponsors of single company schemes, which exist in the Netherlands, do not have this. It is also not necessary for  the employer sponsor to have any role in  explaining anything to employees  though many choose to because they are proud to  be the sponsors of such high quality schemes.

9.     CDCs will need someone to guarantee outcomes

As with so much promoted by the self-appointed pensions expert, John Ralfe, this is incorrect; CDCs may hold more  equity than might be considered  prudent for any individual, but their relative efficiency need not be driven by this.

Many CDCs in the Netherlands do hold guaranteed investment contracts written by insurance companies. As with individual DC there are no guarantees present or required.

10.  CDC would take a generation to introduce

The Dutch have not traditionally had collective DC they have had a form of member mutual DB. CDC  schemes are a relatively new, approximately a decade, introduction to the Dutch market place and they have gained rapid acceptance. There is certainly no  reason to believe that CDC would take a  generation to introduce.

Just about the only part of this article with which we would agree is:

“There is still   much to be done to build confidence in the UK pension system and UK workers  need to continue to be encouraged and incentivised to save more and save longer  for their retirement. We in the pensions  industry have more to do too.”

With that in mind, these ten points seem entirely counterproductive and an institutionally corrupt scare-mongering presentation, containing as it does errors, unfounded  assertions and misrepresentations.

I will leave it to you, gentle reader to decide who to side with on this debate.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in CDC, Change, pensions, Retirement and tagged , , , , , , , . Bookmark the permalink.

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