“10 years too early, 10 years too late” – CDC stands on on an empty platform

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Nearly eight years ago, the Government Actuary ‘s Department produced  a paper that effectively killed CDC. It argued that CDC could not be relied upon to deliver benefits with the same certainty as our DB system and that there was no problem with the way that DC worked.

It was a fatuous paper that was contested at the time by people who understood the gathering storm that would lead to Pension Freedoms , to the near collapse of our private sector DB schemes and to the inequalities of pension provision that prevail in the public sector.

My colleague, Derek Benstead ( formerly a teacher, re-trained as an actuary) produced a reasoned argument to show the short sightedness of GAD’s approach. This document found itself onto Steve Webb’s desk, and to his great credit, he read it, understood it and did something about it. Derek’s argument put CDC back on the table.

Had Steve Webb done no more than enable CDC to be used as “DB without the guarantees” or as a means to spend DC pots as “target pensions”, his Defined Ambition project would have been his greatest legacy. Unfortunately, he chose to voices off and threw into his Defined Ambition paper a host of unlikely variants to CDC , justified by the phrase “in my garden I want a thousand flowers to bloom”.

Instead of blooming, the garden is now blighted, the good flower was strangled by the others and now nothing is growing. I said this at the time of the publication of the DA paper and we see the consequences now.


 

Easier DB or a more robust DC?

For many, (I suspect that among them was the current Pension Minister), a non-guaranteed version of DB was a way for private sector DB to survive the introduction of contracting out, (now just a few months away). It hasn’t been delivered and contracting-out is delivering the coup de grace to what remains of corporately sponsored DB.

The original time-table for the delivery of CDC would have meant that the DWP could have offered employers with DB schemes the opportunity to beef up their DC schemes into CDC schemes, returning us to a system of DB relying on “best endeavours” not the insurance and capital markets. The failure to deliver a credible alternative to DB is the Government’s – not the private sector’s fault- as I will explain in a moment.

Steve Webb held this vision, based on the premise that if he built it they would come. But employers didn’t trust Government and they didn’t come. They had been bitten enough times by the dog that didn’t bark, to know that you don’t put your balance sheet at risk to please a politician. If Webb had been able to offer CDC as a way out of DB in April 2016, CDC would have happened, but he had to consider what that would have meant to the public sector.

In retrospect, had the vision Webb had for DB been presented to the pension industry when it was conceived  in 2005 then it would have been timely. It would have meant the then Government taking on the Public Sector on Pensions and crucially Gordon Brown ducked this challenge.

As it was, it was the Treasury (where GAD sits) that killed CDC in 2008.  CDC was a private sector initiative that was sacrificed to protect the status quo. Government must accept that CDC was not 10 years too late, it was conceived by the private sector on time, it was Government that aborted it.

It would, to follow the logic of “ten years too early, ten years too late” , have to wait well into the next decade before we have the radical alternative to our current binary system of guaranteed “pillar 2” pensions  or pension freedom.


 

Is there any hope for a third way?

At the time of writing, I see no alternative. The current Government has chosen to focus on financial empowerment of the individual to choose his or her way and to put “collectives” in the draw marked “tomorrow”. The Financial Advice Market Review looks to extend the concepts that underpin Pension Wise- Guidance, sign-posted advice and individual sufficiency.  There is nothing wrong with promoting better guidance and more accessible advice but as an advisor with 30 years experience, I’d point out that financial literacy levels have not improved (in my experience)since I started advising in 1984.

I don’t think that we can make our nation pension savvy in a parliamentary term, or indeed in a generation. All the academic work , emanating from the US, Europe and the UK suggests that we cannot make us all our own pension managers. We need default pathways which we can follow to reasonable outcomes. People who want to stray from the default path should be allowed to do so. The default path has to avoid the extreme risks of pension freedoms and the extreme risks of a fully guaranteed approach. There needs to be a third way to spend our pension savings.

So unless that the FAMR concludes that we need a default and not just better signposting to existing products, then we will be back where we were in 1987, when we embarked on the brave new world that led to personal pensions, annuities , mark to market accounting and guaranteed pensions and compulsory indexation.

The Government has not only failed to come up with a credible alternative to DB, it has aborted the best attempt of the private sector to come up with a credible default pathway through the Pension Freedoms. We are ten years too late for the DB crisis and ten years too early for the DC crisis. Thanks to the continued procrastination of Government we will have two pension crisis’ for the price of one.


 

What’s needed is a proper understanding of acceptable risk

Our pension system is in the hands of two groups at loggerheads with each other. On the one hand are the extreme libertarians, who argue that we should be empowered to spend our savings as we like. On the other hand we have the guardians of financial rectitude who want total certainty of outcomes.

Somewhere between here and Beveridge, we have lost the clear voice of pragmatism that tells us we cannot have both of these things at the same time but that we have to find a middle ground which accepts that the future cannot be certain but that we cannot allow people to become a financial burden on others through financial recklessness.

The default path that steers between the philosophical polls of GAD’s certainty and Osborne’s freedoms has been lost, overgrown by a thousand useless flowers and by the false premises of those with an ideological addiction to self-empowerment.

What’s needed is a balanced position that brings the ideological polls together and offers the ordinary person , who knows nothing about pension theory, the opportunity to have a comfortable retirement with the minimum of financial worries.

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About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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