CDC schemes and Ponzi Schemes – a guest blog by Derek Benstead

derek benstead


A tweet is long enough to write an idiocy but not long enough to make a reasoned argument. The quoted tweets from PJ Zoulias  in Henry Tapper’s recent blog say nothing meaningful to give a reasoned response to.
I’ll give a reasoned response to this tweet from John Ralfe: “New cash flows to pay CDC pensions are from new members = definition of Ponzi scheme?”
An investment manager has 300 investors in a unitised fund. In one month, 100 investors make a contribution, 100 make a disinvestment and 100 make no transaction. The manager could invest all the incoming money and simultaneously disinvest the outgoing money, but to do so would be a waste of two sets of transaction costs. Instead, the manager uses the incoming money to pay the outgoings. The transactions in and out are correctly priced using the mid price.

The mid to bid pricing spread and the offer to mid pricing spread are saved. Doing this does not make the fund a Ponzi scheme: the transactions are correctly priced, the product of the number of units and the unit price remains equal to the value of the assets in the fund. Paying a disinvestor out of new money does not mean the fund is a Ponzi scheme, it only means it is efficiently run.
A defined benefit scheme has 100 active members, 100 deferred members and 100 pensioner members. Contributions equal to the actuarially estimated cost of accrual are made in respect of the active members, benefits according to the rules of the scheme are paid to the pensioners. 100 deferred members incur no transaction.

The administrator does not invest the contributions and simultaneously disinvest to pay the pensions because to do so would incur unnecessary transaction costs. Rather, the administrator uses the contributions to pay the pensions. Doing this does not make the defined benefit scheme a Ponzi scheme: the contributions are the estimated cost of accrual and the benefits are according the rules.

Paying the pension out of the contributions does not mean the DB scheme is a Ponzi scheme, only that it is efficiently run.
A CDC scheme has a published actuarial policy for converting a contribution into a target benefit and for awarding annual increases to the target benefit in light of the emerging experience of the scheme.

When a member retires, he or she will receive benefit payments in accordance with the actuarial policy. That a contribution coming in might be used to pay a benefit going out does not turn a CDC scheme into a Ponzi scheme, it only makes it efficient. The important thing is the contribution coming in is turned into a target benefit credit in accordance with published policy and on retirement a target benefit is paid in accordance with the target policy.
Of course, a dishonest person can make a Ponzi out of a CDC scheme just as a dishonest person can make a Ponzi out of an investment fund. But we don’t stop having investment funds because dishonest people misuse them and we should not let the fear of dishonest misuse stop us from having CDC schemes.
But dishonest use of a CDC scheme or an investment fund is not John Ralfe’s point. His suggestion is that using income to meet immediate outgo of itself makes a Ponzi scheme. It does not, the suggestion is false.


This blog is written by Derek Benstead- if you’d like to discuss it with him you can do so at

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to CDC schemes and Ponzi Schemes – a guest blog by Derek Benstead

  1. Con Keating says:

    This Ponzi scheme nonsense is just that, nonsense. CDC are funded schemes and just like their DB equivalents may choose to use new incoming (contribution) cash flow to pay pensions rather than to realise some assets. This is the same basic pooling model of mutual funds – or are we to believe that they are Ponzi schemes as well. This is sound liquidity management. While we are at this, let’s also destroy the idea that CDC cannot close, that they in some way rely upon a continuying stream of new members and their contributions. They simply do not. A closed scheme merely needs to realise assets (in markets) to pay pensions – this is just as is the case with individual DC – or are the all Ponzi schemes as well.

    This man’s Ponzi is beginning to look like any form of saving.

  2. Ryan says:

    Derek. I agree with the comments you’ve made, but there are 2 basic assumptions that I’m struggling to get my head round. We know we have a ageing population so it’s likely that we will have more people taking money out than putting it in. Secondly, the £000’s of pounds being paid as contributions won’t cover the £0,000s being taken as benefits, so I’m not sure the efficiencies are there as much as we would like. Whilst there are clear benefits of pooling from an investment perspective to provide smoother outcomes, be it DB, DC or CDC if you don’t pay enough in, you won’t get enough out.

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