A snag has emerged in the Drafting of the Pension Schemes Bill (that will introduce Defined Ambition and with it CDC).
It’s one of those little things that seems easy to fix but which has potentially huge consequences, a bit like driving a nail into the bit of wall that may or may not have the water pipe behind it!
It would seem that the drafting of the Bill assumes that CDC schemes will be “occupational”, that means that they will be connected with your occupation and by extension your place of work.
If you could only join a CDC scheme if your bosses decided to set one up (or convert their DC scheme), then I doubt many of us would ever have the opportunity of using one.
I had assumed that somewhere in the Pension Schemes Bill would be a little clause that allowed “non-connected employees” to transfer in benefits to the CDC scheme “if the scheme rules allowed”.
Which would make it worthwhile for social entrepreneurs to set up schemes to accept transfers of pension pots that people had built up over their career. My vision for CDC is focused on it being a receptacle for DC benefits that otherwise would have been annuitized, cashed out or transferred to a drawdown arrangement.
But according to some learned friends at a seminar I attended last night, no such provision exists and I get the distinct feeling that, so far, no one has stopped to think of the retail implications for CDC within the drafting of primary legislation.
The fundamental principle behind this is that occupational schemes are sponsored by employers and those sponsors need to be protected from having to subsidise the pensions of any Tom Dick or Sally who walks in off the street.
CDC is different, there are no obligations on an employer, indeed I would argue that an employer is pretty well irrelevant to CDC (other than to pay some money into the pot on behalf of its employees). Could you set a CDC scheme up without a sponsoring employer? Logically yes- but legally no.
So who is CDC for?
I have said before that Steve Webb needs to be clearer about his intentions for CDC. It is one thing to adopt an “if we build it- we will come” approach, another to get support for the project from both the Commons and the House of Lords.
The original intention for DA was to provide employers with a halfway house between DB and DC, but DA has really been taken over by CDC which is the big deal in the Netherlands, Canada, the US and certain Nordic countries.
And the pensions argument has moved on from encouraging a handful of large employers to continue offer something a little better than DC to finding a meaningful replacement to annuities as the way we spend our DC pots.
In my view CDC is the mass means of decumulating just as DC workplace pensions are the mass means of accumulating. These are our defaults for the future and CDC is essential to the success of the budgetary changes now making their way into legislation.
If legislation allows people to convert DC pots to CDC (and I’m pretty sure it doesn’t so far, then there is a ready market of some 18m customers for CDC outside of the few large employers who might sponsor their own CDC scheme.
There is of course a second issue over whether people, once they are allowed to and have the Schemes to invest into- will make voluntary transfers.
Individuals will choose to transfer their DC pots to CDC provided…
- CDC is presented as a packaged alternative to CDC that takes the individual investment decisions out of both the accumulation and decumulation of the pot.
- That the risks of the Collective approach are properly explained- most importantly the risks of retirement income stalling or actually reducing when times are hard.
- That people are able to transfer into a CDC scheme only those amounts they want to provide them with additional income (e.g. they don’t sacrifice their freedoms to drawdown or annuitise part of their DC savings).
To me , CDC becomes an essential choice for people taking Guidance (albeit after 2016 when the first CDC schemes will come off the production line).
The simplicity of the CDC approach which offers predictable outcomes from a collectively managed scheme could in time become the default option for those crystallising DC benefits.
So to restrict their use to employers who have converted to CDC would be an enormous shame.
We can’t rely on large employers to make CDC happen
I heard again last night from large employers who said quite categorically they did not feel any responsibility for the choices offered to their staff after they had crystallised benefits.
This being the case, then a reliance on employers to make CDC happen is misguided. CDC will happen because people need a better way to get their DC pots paid to them, and if they are denied access to CDC, then people like me will be more than a little upset.
Worse than that, political opponents to CDC will be able to point to CDC as an elitist approach that has no value to most people and is not worth the time and trouble that will be spent on it. The Bill will die in the wash-up , if this view prevails.
CDC is too important to simply be debated in the halls of the actuaries. It needs to be promoted nationally for what it is –the natural alternative to annuities and income drawdown.
What needs to happen now?
Those doing the drafting of the Pension Schemes Bill (the one with DA and CDC in it) , must amend its drafting so that CDC schemes can accept transfers in (without losing their right to be considered occupational).
A precedent was set in Pensions Act 2008 when self-employed people were allowed to become a part of NEST, extending that precedent to allow anyone with DC benefits to transfer them to a CDC scheme is a logical extension.
Secondly, and here I confess not to have looked for water pipes behind the wall, I would like the Bill to allow CDC schemes to be set up , without any sponsoring employer at all. Such schemes would simply exist to pay pensions to those who wished to convert their DC pots to CDC and could thus be classed as “pure retail” arrangements.
No doubt this final point will cause a degree of regulatory confusion since a retail product , overseen by the Pensions Regulator, or an occupational scheme overseen by the FCA has yet to be created. But we are at a point when tPR and FCA need to work as one , we have aspects of the Pension Schemes Bill which relate to the Guidance Guarantee and the distinctions between retail and institutional are becoming ever less defined.
Thirdly, we need people who read and agree with what I am saying- to take some action now. The Bill is currently being amended at the DWP and we live in an era of Open Government where our voices can be heard.
If you are interested enough, drop me a line ( email@example.com) and I will collate all comments as part of our on-going dialogue with the DWP.
This article first appeared in http://www.pensionplaypen.com