Pensions -born free and everywhere in chains!

clarenceThere’s a question going round that will bemuse 99% of us , but is of some importance to the 1% who are involved in the CDC debate.

“Can we just leave it to actuaries to set the discount rate for the valuations to be used for controlling CDC?”

Bothered? Maybe not but I’m telling you,”You should be”, because on this question hangs the success or failure of the CDC project and with it, our last best hope of emerging from the annuity crisis this site of 2020.

Give John Ralfe one sniff at this and he’ll be issuing gagging orders but here is one of the most revolutionary and incendiary e-mails one actuary can send another. I publish it anonymously but anyone who is familiar with the debate will be  familiar with the ease of expression and vigour of thought that lie behind it.

 “Well if a CDC scheme were invested 100% in a passive UK equity fund and the trustees had a policy of awarding annual increases in line with dividend growth, then the correct discount rate would be the dividend yield, and no actuarial opinion is required.

The interesting thing about a CDC scheme is that one can design the “liabilities” to match the assets, in a reverse of the usual way of doing things, and there doesn’t have to be a problem of deciding what the discount rate is.

I think there is a potential problem of actuaries at large not knowing what a good way to manage a CDC scheme is, but then actuaries at large don’t know what a good way to manage ongoing DB schemes is either (oh, that’s not a reference to TPR actuaries by the way! TPR actuaries are not at large 🙂 )

GAD’s oft quoted CDC modelling didn’t work at all, but I think in practice there is plenty of time to change plans as we go in a CDC scheme, and for actuaries to learn how to advise. Modelling sets a plan at the outset and models it running unchanged until a modelled failure (at least, that’s what GAD did). In practice, if trustees of a CDC scheme were advised by a GAD actuary and after 10 – 15 – 20 years the actuarial plans were going awry, the trustees would change plan, not carry on to destruction. Pension schemes are long term and there is time enough to adjust plans as we go.

What do people want from a pension scheme? I expect most men and women in the street would struggle to answer this question objectively. They might express an answer on the lines of “to maintain the standard of living in retirement which I had while in work”. I feel that there is a general sense in which having a CDC scheme invested in UK real assets is low risk: if the economy does well, the real assets do well, the CDC outcome is higher but people’s expectations are higher. Conversely, if the economy does badly, the real assets do badly, the CDC outcome is lower but people’s expectations are lower. We judge wealth and poverty relatively to what others have got.

Most DB scheme members don’t expect absolute guarantees, contrary to what the EU and DWP thinks they should expect. If a scheme goes into PPF assessment, it is a very small number of members who write to complain of benefit cuts.

If we try to be certain CDC will work for the next 70 years before we commit to starting, we will never start. Suppose the UK had no private pension system and we had to set one up, choosing between DB, CDC and DC.

Wouldn’t we say:
“DB, we can’t set that up, the risk at some point in the next 70 years of underperforming assets leaving a massive sponsorship cost and breaking the system is far too high.”
“DC, we can’t set that up, the risk at some point in the next 70 years of a whole generation of workers being unable to afford to retire until 10+ years after they expected to and screwing the job prospects of a generation of school leavers is far too high.”
“CDC, we don’t know what the future holds, but we do know that CDC can adapt as we go.”


The reality of the CDC debate is that there will always be reason not to change. But unless we change the current systems, DC will continue to disappoint the beneficiaries and DB the shareholders/taxpayers.

The point is that it is because Dutch schemes are run to maximise outcomes and not to observe rules, that they work.

But hark- I hear the sound of men in black leather coats holding strong dogs on weak leashes. I had better run for cover – pensions were born free and everywhere they are in chains

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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3 Responses to Pensions -born free and everywhere in chains!

  1. Con Keating says:

    That is a quite lovely blog, Henry. when time permits I will write a fuller response – at this time I will content myself by saying that the discout rate is not the divdend yield today but the expected dividend yield over the life of the fund and that perhaps leaves room for actuarial wisdom.

  2. Jan Snippe says:


    Any discount rate at or higher than the risk-free rate of return could work provided that members find it acceptable that the uncertainty about their retirement benefits will be a reflection of (a) the risk taken to justify the selected discount rate; (b) the uncertainty about the distribution of the resulting gains and losses; and (c) their inability to asses what that distribution will actually mean for their benefits. Member communication will be a nightmare – even for CDC plans with clear rules, and simply be meaningless for those without rules or without the commitment and the stamina to obey their rules when the going gets rough.

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