Some commercial considerations for CDC


So who’s going to “sell” CDC?

What an odd question!

I can see the friends of CDC choking over their cornflakes at my asking this question. In the gentile world of policy- it is rarely done to use the “s” word! But for a policy to be successful, it needs take up. There may be a thousand flowers blooming in the garden but they all need water!

CDC is a type of pension scheme for whom it is easier to find buyers than sellers. This unusual state of affairs is because so far, the attention given to it has been from those on the buy-side – politicians, policy makers, consumer groups and those acting as pension fiduciaries. CDC’s promotion has been from actuaries and lawyers, those who are seen as having most to gain by its success, but so far, no-one has really focussed on how CDC schemes might be delivered to the market.

CDC challenges traditional distribution models

If I was (still) an IFA, I would be asking myself, “why would I want to promote a solution that takes diminishes my relationship with my client (effectively outsourcing pension management to the CDC operator)”.

If I was an insurer, I would see CDC as threatening not just my distribution rights but the embedded value of my DC portfolio.

If I was a union, I could see CDC as a further dilution of members right to a guaranteed pension (especially where those rights remain strong – e.g. the public sector).

There is no commercial reason for CDC to be promoted, the benefits of CDC are individual and societal, they are likely to diminish rather than increase the profitability of the “pensions industry.

I do not see CDC being adopted by the existing players other than as a defensive measure.

CDC plays to the new distribution models

The biggest change in pensions distribution over the past fifty years has been auto-enrolment. Not only has it enrolled over 9m new savers into regular retirement saving but it has done so without the assistance of the direct sales forces or retail (rather than corporate) IFAs.

The beneficiaries of this change of distribution have been the master trusts, most obviously NEST, NOW , Peoples and a legion of “upstart crows” most notably Smart.

They have the relationships with small businesses that (by and large) the traditional insurers have failed to reach.

The obvious distributors of CDC pensions will be the master trusts and the most obvious master trust to be involved would be NEST. Despite the DWP knocking back NEST’s request to provide “guided pathways”, I would hope that the opportunity will knock for NEST to provide a CDC section or a new “NEST CDC” scheme.

In time, the workplace pension providers could fill the void between those with super-small pots (that could cash-out with little negative consequence and the larger pots that could be managed with the help of an IFA “wealth” manager).

CDC could de-risk  transfers for DC providers.

While I am sure the sales teams at the large insurers and SIPP providers are enjoying a merry Christmas, the bumper years on 2016 and 2017 have been fuelled by enormous shifts of money out of DB and into their products. The Prudential, Royal London, Zurich , Old Mutual, LV and a host of SIPP providers (Hargreaves Lansdown excluded) have simply held out their platforms and watched the money fall in (like the cook with his apron).

The insurers should have sufficient memory to remember the last time this happened, things ended badly. I see things ending badly again and much of that money will have to go back, unless the outcomes of these platform investments, proves better than what the ceding scheme offered.

CDC may not be as profitable to an IFA or platform manager, or SIPP provider or asset manager, but it looks a whole lot safer – if the phrase “safe harbour” means anything at all.

Of course, just because money has reached a CDC scheme, does not mean the CDC scheme will succeed.

But if the CDC model is fit for purpose, and we intend to prove within reasonable doubt that it is, then all these parties may be prepared to swap mega-bucks with a big risk ticket for more moderate profits with lower risk attached.

In practice, I do see IFAs , faced with clients who have good reason to transfer but insufficient funds to merit their wealth management, offering the transfer advice and operating or recommending CDC.

The role of large employers

My primary focus in writing this article , is to set some hares in travel towards the doors of IFAs , SIPP Providers Master Trusts and Insurers. None of these parties have been included in discussions on CDC, mainly because it has been assumed that CDC will be focussed on large occupational pension schemes looking to move to a new benefit basis for future accrual. Royal Mail has already stated that this is its intention, not just for the members of its DB scheme but also for those in the DC scheme – CDC for 140,000 postal workers.

The implications for other large schemes such as USS, BT and even some of the public sector schemes are obvious.

Large employers are not the sole source of likely flows into CDC but they remain the most obvious and most reliable source. It may well be that the impetus to complete the legislation needed for Royal Mail to set up afresh (and avoid strike action) is CDC.

Royal Mail may beat down the door for other large schemes to follow and these schemes collectively may encourage other schemes to follow. The slow burn of workplace pension accumulation does not require organisations like Peoples Pension and NEST to be in any hurry but the acute problem of pension transfers means a solution for those with small transfers is more pressing.

It is tempting to look at a total rewrite of pension legislation but that temptation should be resisted. In practice I see CDC as an extension of DC and that the many flowers in the defined ambition garden can progress as demand from the market requires.

Demand from the market is currently with the large employers with acute DB problems and those problems include the loss of billions of pounds through CETVs to unknown outcomes.

Building a commercial case for CDC provision is as important as identifying demand.

Building a CDC distribution model around these two fundamental needs should allow the workplace pension providers to follow in at a speed they decide on.

I will be seeing the FCA to discuss all this in the first half of January and would welcome any thoughts from readers. The commercial considerations of CDC are critical to its success and they are the little elephants roaming the room.

Compulsion and incentivisation

What CDC does not need is Government incentivisation. If CDC cannot work within the current tax framework then the commercial model for CDC is at fault. No doubt wealth managers will show that for those with high net worth, CDC is not tax-efficient and there will be all kinds of special reasons why those with smaller DC pots might be advised away from CDC.

But CDC is not a tax- driven product, it is designed for people who want the ease and comfort of a wage for life without the drag and risk of having that wage guaranteed.

The Government’s role in the incentivisation of CDC should be as light touch as possible. Perhaps its most important role would be to make the provision of CDC as difficult as possible to any party looking to make a quick buck. The long-term nature of the enterprise requires the investment of patient capital – both financial and human – in return for consideration that is steady and reliable.

consideration 2

The Government should give consideration to “consideration” as the basis of its enforcement.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Some commercial considerations for CDC

  1. John Mather says:

    Commercial Aspects a wider perspective.

    Compulsion can hardly be argued as a successful distribution method. We will see what happens to membership when the contribution rate of auto enrolment increase takes effect and is felt with a lag of two or three months

    The Independent Financial Adviser of today cannot be compared to the time when you flogged policies in the street with a clip board you were a commission salesman and not a financial adviser.

    In those days insurance companies competed on funding rates for final salary schemes by exaggerating performance projections and Boards of Directors were bribed by special uplifted 60th for Board members. This practice resulted in defects when leaving members could no longer be robbed on the way out to pay for the deliberate defect.

    Prime Ministers and a few other senior politicians had to serve only one day in office to receive full benefits

    Carears have been built on knocking the advice business and high profile critics don’t like to be reminded that they extolled the merit of Equitable life who did not pay commission but did pay “volume related salaries” before failing

    One wonders why no one has a go at pensions lawyers where income can be in excess of £1m pa. Slightly in excess of incomes of a good financial adviser? Or at other professionals responsible for extolling the benefits of DB ignoring the pensions graveyard of failed promises instead employing endless discussions and studies of the entrails of flawed basic maths and nauseating patronising pity for poor members. The sole objective seems to be to find a special pleading argument to deflect blame by finding a few clip board relics of the past picking on the bones of pension corpses

    The solution to this pensions disfunction needs fundamental review. The clues are in your assessment of funding (FAB) which with a proper stress test which means higher contribution rates less special classes and a cap on tax payer funded benefits for senior executives.

    Alignment of funding promises with NAW with a cap of say twice NAW might align the limits of NNT structures allowing for AVC or DC top up of TNN ( the ISA)

    One last thought on your selling proposition you are quite right that nothing happens until someone sells but faith in pensions will never be restored by the destructive constant knocking of others. Surely you can see how Government internal bickering over decades destroys and brings down that Government by destroying public faith. So why don’t we have a more united front in pensions

    Stop biting the hand that feeds you.

    Happy New Year Henry keep up the good work

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