Cardano’s CDC submission and what Con Keating thinks of it

This is a critique of Cardano’s submission to the Work and Pensions Committee by Con Keating. Con’s comments are in red and are interspersed with Cardano’s which remain in black. Because of the numbers of formats of the various documents received, much of the paragraph numbering in Cardano’s document may have been lost.

There may also be occasions where comments are not properly attributed, let that be. The overall sense is obvious.

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This is a review of:

Written evidence from Cardano risk Management Limited (CDC0012)

It reproduces that submission in full and offers commentary in red typeface.

Executive Summary

• The assessment of the relevance and effectiveness of CDC depends on the purpose for which CDC is being considered.  We have set out our responses below in the context of approaches to “pay out an adequate level of index-linked pension for life but this is an ambition rather than a contractual guarantee” .  The problem here is that this is a particular vision which marries poorly with retirement consumptions needs or patterns. It is in other words rather an inflexible vision. One of the attractions of the freedom and choice regime is that it may accommodate variable consumption in retirement.
• We also address the issue of CDC as an alternative to existing DB plans where that question has specifically been asked.
• We agree that the success of pension provision should be assessed in the context of the index-linked pension for life that savers ultimately receive.  This is too inflexible -see above.
• However, the current focus of DC sponsors, savers, trustees and providers is on the size of the pot of assets (accumulated at retirement) not the lifetime income these assets will generate.  We agree that the current emphasis on pot size is unhelpful. The nature of retirement is such that two, or perhaps more metrics, are needed to begin to assess adequacy: Capital and Income, to be presented in tandem.
• A fundamental change to the way success is benchmarked, moving from pot size to income in retirement, is needed to centre the debate on the provision of an adequate level of index-linked pension for life. This may be a fair representation of the outcomes of a particular member’s savings, but this income or capital interacts with the other pensions and benefits receivable, as well as personal taxes.
• We favour an income-focused implementation of traditional DC over CDC to deliver an index-linked income for life to savers in the UK. This is a denial of any collective benefits.
  • Traditional DC is simpler to implement and operate than CDC.  Returns are transparently allocated in traditional DC whereas CDC’s smoothing approach introduces operational and computational complexity as well as potential inter-generational inequality. There is absolutely no need for anything to be smoothed in CDC. The smoothness of their outcomes arises from the structural design of the scheme and risk-pooling and sharing arrangements within that. CDC can be equitable among all members, present and future.
  • The ‘income ambition’ offered by CDC might well create extra complexity and confusion.  This is simply not true. With decumulation options embedded within the CDC scheme, there is far less complexity for the member. They are not on an individual basis faced with the at retirement decisions and complexity of individual DC. If the confusion is over the nature of the ambition, this is easily resolved through member communications.
  • Cuts to income in payment, whether explicit or implicit (by not granting increases while inflation erodes the nominal amount in payment), have triggered adverse emotional reactions. This should have been obvious as an outcome. In addition the mechanisms for requiring cuts are themselves badly flawed. They may be expected to generate far more cuts than hindsight will prove were necessary. And for some there will be no possibility of restoration.
  • Experience from the Netherlands has shown that members perceive the income ambition as a guarantee.  Indeed, they do, but this is largely because for the majority of current pensioners this was exactly what they were. The rebranding of the flawed Dutch DB model as CDC and its consequences were never adequately explained.
  • CDC is not compatible with individual freedom and choice. This is the most common of canards; it is simply untrue.
  • Freedom and choice introduces both anti-selection risk (with members making decisions that advantage them at the expense of the rest of the pool) This is simply not possible.
  • and discontinuity risk (where the pool effectively ceases to function due to loss of scale and/or liquidity). Freedom and choice may add to the proportion of members taking transfers out but the empirical evidence is that the majority of such transfers are ill-advised, that people grossly underestimate their own life expectations. There are strong incentives for younger individuals to join a scheme, and these may be strongest when the scheme is in deficit in the sense of assets not fully covering the targeted ambition.
  • Effective risk sharing requires that members cannot withdraw from the risk-sharing pool in adverse times.  Again, not true. In a properly structured scheme, members may withdraw at any time at the net asset value of their accumulated equitable interest.
  • Longevity risk is shared in a CDC arrangement, particularly if members cannot leave the pool once they have joined.  Longevity risk is actually pooled, not shared. There is no need to restrict members to remaining within a pool – see Freedom and Choice earlier.
  • Members of traditional DC schemes can manage longevity risk by purchasing an annuity, sharing part of the risk with other annuitants and the balance with the insurer. I am really not sure where these other annuitants come from. The writer of an annuity is the insurance company and privity of contracts limits your redress to suing just them, and not other policyholders or reinsurers.
  • Traditional DC has access to the same investment opportunities as CDC.  But CDC will have longer investment horizons- the time-amount couplet of CDC is far larger than that of DC.
  • Similar economies of scale are available to CDC schemes and traditional DC schemes of a comparable size. As was stated above, CDC will be larger than the equivalent DC as it will be running the post retirement assets of its members.
  • Introducing CDC will add further regulatory complexity at a time when UK pensions would benefit from simplification. This is nonsense. New pensions really take only one form outside of the public sector, DC. There is much else that could and should be simplified. Allowing management of pension liabilities could actually be regraded as completing that market.

• An index-linked income for life can be efficiently provided through a traditional DC scheme that implements an effective risk-managed approach to both investment and longevity, with pooling taking place in later life. The problem with this assertion is that it gives no indication why or how that later life pooling will take place. It also fails to recognise that risk sharing during the accumulation phase brings advantages for all members.
• Having a clear objective, in this case the provision of an index-linked pension for life, and managing against this objective is the basis of effective risk management.  Without risk-pooling and risk-sharing among members, effective risk management must be costly. Effective governance oversight and clear fiduciary responsibility support implementation of a risk managed approach too. This is motherhood and apple pie; without specifics it is vacuous.
• The issue of adequacy is largely one of levels of contribution rather than nature of provision.  What utter rubbish, investment returns are an order of magnitude more important than contributions. CDC schemes do not change the size of assets to be shared between members and service providers compared to a traditional DC scheme invested and administered in the same way. CDC operates by the manner in which it distributes assets among members according to their equitable interests. If anything, a CDC scheme is likely to result in less assets being available to members due to its expected higher operating costs.  Again nonsense. These costs relate to the day-to-day implementation of risk-sharing, the set-up of the legal infrastructure for risk-sharing and the regular communication of the results of risk-sharing. CDC schemes do not have legacy systems problems – information could be made available to members using today’s technology in near-real time.

• CDC will not resolve the issues faced by seriously underfunded DB schemes as it cannot create assets that do not exist.  There are, however, other ways to address the issue of underfunded DB schemes but these are beyond the scope of this response. It is good to see that they have learned something from the Dutch experience.

1.              Introduction

1.1              Cardano was founded in 2000 in the Netherlands to help pension plans achieve their financial objectives in a steady, predictable way by applying robust investment and risk management techniques.  We opened our UK business in 2007.

1.2              We currently employ around 170 people in the UK and Netherlands, servicing the investment and related risk management needs of clients whose assets total in excess of £120bn. We have a team of over 100 in London and we work with 25 UK pension schemes whose assets total over £50bn.

1.4              Cardano has previously provided input into UK pension policy design, including the ‘Reshaping workplace pensions for future generations’ consultation (November 2013).  Our submission to this Inquiry is a continuation of this input.  We have extensive experience of the Dutch pension system, which has been cited as an example for the Inquiry to consider.  We share our experiences and learnings from the Netherlands in our response.

1.6              We have limited our responses to the questions where we are able to provide meaningful input.  We have prefaced these responses with some general observations about CDC.

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2. General observations about CDC

2.1 The assessment of the relevance and effectiveness of CDC depends on the purpose for which CDC is being considered.  We have set out our responses below in the context of approaches to “pay out an adequate level of index-linked pension for life but this is an ambition rather than a contractual guarantee” <added emphasis is ours>.  We also address the issue of CDC as an alternative to existing DB plans where that question has specifically been asked. See earlier comments.

2.2  We note that the recent review of Automatic Enrolment stated that “the fundamental purpose of pension systems is to replace income in retirement”.  This view is consistent with considering CDC (and alternatives) to pay a pension for life.  This is a tenuous overstatement.

However, these positions are inconsistent with the freedom and choice changes implemented in 2015. This is simply not true. One way of viewing freedoms is as the equivalent of borrowing during one’s working lifetime. They can play an important role as substitutes for precautionary savings and accommodating irregular consumption patterns.

These changes have resulted in many retirees consuming their pension savings as a one-off lump sum.  Indeed, and in doing so they have prepaid income taxes, quite likely to appoint which exceeds their otherwise lifetime total tax payments.

Many trustees, savers, sponsors and providers now appear to consider pension saving as providing a lump sum at retirement and/or an income in retirement (which might be variable or guaranteed for life).  A consistent approach to pensions policy would simplify second-order considerations such as the nature of provision. I am completely at sea as to what is meant by a second order consideration.

2.3        We agree that the success of pension provision should be assessed in the context of the index-linked pension for life that savers ultimately receive. See earlier.

However, the current focus of sponsors, savers, trustees and providers is on the size of the pot of assets (accumulated at retirement) not the lifetime income these assets will generate.  Consideration of (absolute) returns earned is another way of looking at the size of the pot of assets – the income equivalent is to consider the return earned relative to the change in the cost of the lifetime income.

A fundamental change to the way success is benchmarked, moving from pot size to income in retirement, is needed to centre the debate on the provision of an adequate level of index-linked pension for life. This is simply unimplementable – the relation between today’s pot size and that as retirement is highly uncertain as was demonstrated by the PPI work done for the TUC, added to which is the uncertainty of the future annuity rate.

2.4              The cash flows that make-up an index-linked income for life increase in-line with a specified index (usually a measure of inflation) and are payable for life. The likelihood of savers not receiving this desired index-linked income for life depends on how the method of pension provision deals with managing indexation risk and longevity risk. This is in fact the core of a well-designed CDC scheme, investment risk is exogenous, but these risks are internalised within the scheme.

2.5              CDC schemes enable groups of members to pool their assets.

 

 

Indexation risk is not directly managed.  It is; within the scheme. Smoothing investment returns, say, from year to year to try address indexation needs introduces operational and computational complexity as well as potential inter-generational inequality. There is no smoothing of investment returns, and therefore no computational complexity or possibility of intergenerational inequity.

Investing in ‘longer-term’ assets, which we have interpreted to mean assets with a higher expected long-term return but less certain pricing in the short-term, increases the difficulty in smoothing returns equitably. This states in convoluted fashion that long term assets are more volatile than short-term. This is mechanically true of bonds, but if we think of these investment assets as being those with the most predictable long-term fundamentals, quite the opposite is the case. Some forms of infrastructure investment are prime examples.

• • Longevity risk is shared, particularly if members cannot leave the pool once they have joined.  This is true, but it is not necessary to lock members in once they have annuitized. particularly when those annuity payments may be modified.
  • Sharing longevity experience equitably creates greater operational and computational complexity than if not shared. This is just not true – though CDC is operationally more complete than simple DC. It actually takes place within DB schemes currently.
  • The characteristics of the CDC scheme change as members join (and leave if permitted), making the sharing of this changing risk even more complex. These changes are likely to be extremely marginal. With the ex-ante and ex-post risk pooling and sharing envisaged in my generic scheme description, actually less than the confidence intervals arising from projection assumptions.
  • Risk remains with the members of the CDC scheme, despite potential perceptions to the contrary. Risk does remain with the members of the scheme but it is smaller than the sum of the risks to individuals alone.
  • The ‘income ambition’ offered by CDC creates extra complexity and confusion, particularly in times of benefit reductions as the income is often considered to be guaranteed. There is no extra complexity. Confusion may be eliminated by an appropriate communications strategy. With scheme rules clearly stated and fund status freely available there need be no confusion.
• 2.6              Traditional DC schemes have clearly identifiable individual ‘pension pots’ within a shared operational environment. They have pots of assets. The distribution of scheme assets across scheme members is determined by their individual pots.

• • Indexation risk can be directly managed if the investment strategy consciously addresses this risk.  This does not recognise that contributions are subject to a degree of inflation exposure in a converse manner.
  • There is no barrier to implementing an approach to managing indexation risk in a traditional DC scheme although we are aware that many traditional DC schemes do not currently do so.  This would involve the use of exogenous costly hedging instruments unless embedded within the base asset allocation. It would then constitute a temporal imbalance. The risk of concern occurs post-retirement.
  • The strategies widely employed by DB schemes for more than a decade are possible in traditional DC schemes too. Where of course they would be redundant.
  • Longevity risk can be directly managed post-retirement, if a deliberate decision is made to do so.  The retiree’s entire savings can be used to purchase an immediate annuity at retirement.  Alternatively, part of the savings at retirement can be drawn-down to pay-out regular income for a specified period.  The balance of the capital would be pooled to provide for life after this specified period, in one of two forms:
    • A mutual arrangement, if permitted by regulation, where the pool is shared among the surviving members through time, with no ability to withdraw from the pool; or
    • Buying an insurance product to provide a guaranteed income for life, if the retiree is still alive, at the end of the specified period of the payment of the cash flow stream. I wonder how many people have the cognitive abilities to indulge in these strategies,

Members are clear that risk remains with them, unless they decide to join a different arrangement. The attraction of CDC is that it reduces the risk exposure of members.

• 2.7              An index-linked income for life can be efficiently provided through a traditional DC scheme that implements an effective risk-managed approach to investment prior to retirement as well as in the initial specified period (e.g. 20 years) after retirement. This would read better, and be true, with the whistles and bells removed – as well as after retirement.
• The balance of the retirement savings would be pooled to provide an income if the retiree survived the initial specified period in retirement. This would be a highly uncertain pool with highly variable annuity outcomes.
• 2.8              The issue of adequacy is largely one of contribution (amounts and duration) rather than nature of provision. Again, I do not understand what is intended to be conveyed by this sentence. CDC does not change the size of assets available to be shared between the members compared to traditional DC. This is not true – see earlier.

• • It might, however, change the distribution of assets between the members.  Some of the ‘better outcomes’ found by the RSA and Aon Hewitt studies are based on anticipated operational efficiencies (addressed in 2.13 below) and the balance on the assumption of higher returns from more ‘risky’ investment strategies.  This may be true but it does not apply to all of the studies which have produced similar results. These riskier strategies are available to traditional DC schemes, should the trustees of these schemes so choose.  However, the longer term of CDC admits a far greater risk tolerance that traditional DC. Two schemes invested in the same way will achieve the same results.  Over the same period, but the CDC will continue for a collective retirement lifetime.
  • There is no guarantee that these riskier investment strategies will ultimately deliver better returns – there have been long periods in the past where riskier strategies have delivered worse outcomes. The term of the investment horizon is for CDC is almost twice that of DC. In the recent FED studies of safe and risky assets the assertion made does not hold true. It should also be recognised that sustained low returns mean low prices and greater future return opportunity.
• • 2.9      Investment strategies with investment horizons that, in theory, span multiple generations assume that future generations will join the scheme to provide shorter-term liquidity.  There is no need for any such assumption. We do not consider such strategies as viable as generations of future members cannot be guaranteed.  The AON study showed that CDC schemes may be successfully “run-off”. Relying on future generations introduces discontinuity risk. There is no need for any reliance on new members. The risk pooling and sharing benefits are among existing members. There are in fact substantial benefits and incentives provided to new members.
  • 2.10              The DC member currently must take the decision as to the form and nature of benefits to be received at retirement.  The CDC scheme may provide a set of decumulation options, including annuitisation, to members. The member would have to elect to remain in a CDC arrangement at retirement, impacting the risk-sharing arrangements, unless the CDC scheme’s rules did not permit the member to make a choice (and amended legislation/regulation permitted such compulsion). This is not true. No-one is envisaging compulsion at any point with CDC.
  • 2.11              Risk-sharing does not mean that all members are better off, before considering the additional costs of risk-sharing.  What additional costs? There are losers for every winner, in
  • Investments – where some members will receive less than their assets have earned, to balance out those members who receive more;The investment risk-sharing in my vision is that the young support or subsidies the old when expected returns are high and vice versa, the old support the young when expected returns are low with the consequence that over the life of the scheme members should be both winners and losers. It is true inter-temporal risk-sharing, not cross subsidy.
  • Macro-longevity – where generations that, on average, live longer than anticipated consume the assets of later generations until their retirement benefits are cut to reflect this increased longevity.  Generations that, on average, die sooner than expected contribute to the assets of later generations until their retirement benefits are increased to reflect this diminished longevity; and
  • Micro-longevity – where members who die earlier than the population average ‘subsidise’ members who die later than the population average. This presentation is entirely unhelpful, perhaps deliberately so. It is perfectly to maintain balance among the equitable interests of the members of a scheme and with that their interest in the scheme’s assets. Indeed the balance mechanisms can be constructed to be self-equilibrating.

• • 2.12              In aggregate, we expect members in a CDC arrangement are likely to lose compared to those in an equivalent traditional DC arrangement invested and administered in the same way. This is complete tosh. This expected loss is due to the greater anticipated costs of running a CDC arrangement, particularly the costs related to calculating and implementing the risk-sharing on a regular basis. They clearly have no comprehension of the capabilities or costs of today’s technologies. The legal costs of setting up a CDC scheme are likely to be higher than those of setting up a traditional DC scheme due to the more complex trust deed and rules, which would need to codify the operation of the risk-sharing arrangements. In the greater scheme of things, the legal expenses are really not a concern – as more schemes are created most of the terms will become close to standard boilerplate. Start-up expenses could in any event be amortised over the scheme’s lifetime. There are also likely to be greater communication costs due to the greater complexity of CDC that would then need to be explained. Again with today’s technology this really does not need to be true.
  • 2.13              The economies of scale touted are not the sole preserve of CDC arrangements.  Multi-employer arrangements (e.g. master trusts and group contracts such as group SIPPs), and perhaps even large single employer arrangements, can reach the scale that achieves these economies.  It is up to the service providers to pass through these benefits and/or the client to negotiate access to these benefits. This is one reason why CDC should be established as member mutual bodies.
  • 2.14              Effective risk management, as we have seen implemented in DB schemes over the past decade or two, is the key to predictable outcomes not risk-sharing.  This is total and utter rubbish. The risk management we have seen in DB has done nothing but add unwarranted costs to DB provision. It has even included the hedging of non-existent risk (discount rates). Having a clear objective, in this case the provision of an index-linked pension for life, and managing against this objective is the basis of effective risk management. See earlier comments. Effective governance oversight and clear fiduciary responsibility support implementation of a risk-managed approach too. I do not know what this incomplete sentence refers to.
  • 2.15              Introducing CDC will add further regulatory complexity at a time when UK pensions would benefit from simplification. Repetitive tosh – see earlier.
    

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• 3.  Benefits to savers and the wider economy

• • Would CDC deliver tangible benefits to savers compared with other models?

  • 3.1              We do not think that CDC would deliver tangible benefits to savers compared with effectively-managed traditional DC models.  CDC does not unlock any investment opportunity or relevant risk management technique not already available in these models.  This is simply not true.
  • The higher expected operating costs, as set out 2.12 above, are likely to result in worse outcomes for members in CDC schemes compared to traditional DC schemes. More inaccurate repetition  
  • 3.2  There might be optical benefits to savers in CDC schemes in the short-term compared to traditional DC schemes.  These optical benefits would ‘appear’ in cases of market downturns, if the CDC scheme then over-stated the holdings of the members compared to the underlying assets as part of a longer-term smoothing approach.  This is scandalous. It is an accusation of fraudulent misrepresentation. In any event, it is not possible as it relies upon smoothing to be applied when the smoothness of outcomes is an outcome of the design’s operation, it is not an input to the valuation or distribution process. The intent would be to clawback the over-statement in the event of a subsequent market rise

 4. How would a continental-style collective approach work alongside individual freedom and choice?

• • 4.1              Individual freedom and choice is not compatible with an approach that smooths asset values through time (if that is what is meant by “a continental-style approach”). But there is no smoothing. Situations where asset values are over-stated, as part of a smoothing process, create the opportunity for anti-selection by (more informed) members. But there is no smoothing. This anti-selection can be guarded against by provisions that write-down the values available on transfer to the underlying asset value. Transfers at net asset value are always possible. However, these provisions take the scheme back to operating as a traditional DC arrangement, albeit with greater cost and complexity. They do not; the risk pooling and sharing mechanisms could not result in that outcome.
  • 4.2 Individual freedom and choice is also incompatible with micro-longevity (i.e. between individuals within a scheme) risk-sharing.  Members who know they are in poor health can select against the rest of the scheme and withdraw their benefits.  This action would deprive the remaining members of the expected cross-subsidisation arising from earlier than anticipated deaths. Allowing chronically sick members access to their funds at net asset value does not affect the viability of the scheme – allowing members access under freedom and choice more than compensates given the well-known proclivity of individuals to underestimate their lifespan. It would also serve to reinforce the solidarity of scheme members.

  • 5.Does this risk creating extra complexity and confusion? Would savers understand and trust the income ‘ambition’ offered by CDC?

• • 5.1              We expect that CDC will create extra complexity and confusion.
  • Experience in the Netherlands has shown that savers do not fully understand the income ambition offered by CDC, treating the income ambition as a guarantee.  Cuts to this income have triggered adverse emotional reactions.
  • These cuts, as well as years when retirement income is held level in monetary terms (i.e. cut in real terms), undermine trust in pensions. Then you really should have objected when these schemes were changed from DB to a bastardised form of CDC without explanation to or the consent of scheme members. It is compounded by the fact that many of these cuts have proved unnecessary.
  • 5.2              Pensions in the UK are already not well trusted.  Adding further complexity and risk of disappointment to the system is unlikely to be helpful. A properly designed CDC can deliver both superior results to and a lower risk for members than traditional DB.
  • 5.3              Complexity has been acknowledged as an issue limiting savers’ engagement with pensions.  The recent review of Automatic Enrolment proposed measures to simplify pension-related communication.  The Pension and Lifetime Savings Association is currently consulting on ways to present simple (to understand) retirement income targets.  Introducing CDC, and its related complexity, would be heading in the opposite direction of travel compared to these initiatives. This is again nonsense.

  • Converting DB schemes to CDC

  • 6.              Could seriously underfunded DB pension schemes be resolved by changing their pension contract to CDC, along Dutch lines?

  • 6.1              Converting existing DB schemes to CDC will result in the benefits of members of these schemes being reduced to a level that is consistent with the assets in the scheme, in the absence of further contributions by the sponsor.  The under-funding would be crystallised at the point of conversion.  A conversion process that seeks to advantage one group relative to another during the conversion process is likely to fail, as was evidenced in the Netherlands in 2011.  In that case, older members stood to benefit at the expense of younger members.  This proposed inter-generational transfer of wealth received widespread media coverage, resulting in the process being scrapped. At last a recognition that the Dutch system is thoroughly flawed.
  • 6.2              The conversion process will not create assets that do not exist. However, it could free assets which were previously utilised to offset possible risks to the sponsor.
  • 6.3              The conversion process removes the explicit backing of the scheme sponsor to address any deficit, to the extent that the sponsor is willing/able. And it also reduces the cost of that sponsor guarantee.
  • 6.4              The conversion will also likely eliminate the possibility of the scheme being eligible for acceptance into the Pension Protection Fund (PPF). CDC should not be eligible for the PPF. Nor should they be levy payers. Members’ benefits in the PPF might be greater than in the converted scheme.  The PPF benefits will be more stable than those in the converted scheme, albeit without exposure to the potential upside of investments in a CDC arrangement. We should not forget that the PPF is itself a CDC scheme. albeit poorly designed with a unique entry requirement – in extremis it may cut benefits further.
  • 6.5              The impact of one or more of the factors listed in 6.1 – 6.4 above means that members will likely be no better off and possibly worse-off following a change from DB to CDC. Not one of these so-called arguments holds water.
  • 6.6              There are measures that can be taken to address the stresses in the current UK DB system.  The detail of these measures is beyond the scope of this response but include: capturing the benefits of scale; defining clear accountability for financial outcomes; implementing robust risk management; and retaining the ability to renegotiate pension benefits. This is not so much blue sky thinking rather more in fantasy land. No finance director would consider creating a new DB scheme today, given their experience in recent decades. The remedy being proposed is more of the same medication that has left the patient mortally injured. 
    

    Regulation, governance and industry issues

    7. Would CDC funds have a clearer view towards investing for the long term?

• • 7.1              The investment opportunities available to a CDC scheme are the same as those available to a traditional DC scheme.  Consequently, CDC schemes do not, in theory, have a clearer view to investing for the long term. This is not true – see earlier
  • 7.2              Traditional DC schemes are, however, often subject to daily pricing and liquidity requirements by the investment platforms used for administrative purposes.  These requirements are not statutory. These requirements do, in practice, limit the ability of traditional DC schemes to invest in less liquid and/or less frequently priced instruments.  However, these requirements do not inhibit traditional DC arrangements from making and holding investments for long periods of time. Agreed
  • 7.3              Section 76 of the ‘Governance and administration of occupational trust-based schemes providing money purchase benefits’ Code of Practice, also known as the ‘DC Code’, requires that contributions are invested within three days of receipt for daily-dealt funds.  This investment window extends to five days if the funds are dealt less frequently than daily.  This requirement limits the ability of traditional DC schemes to invest in less liquid assets.  We expect that CDC arrangements would be subject to the same requirements.  We would not expect this. The member’s equitable interest is defined from the moment of payment of the contribution; the disposition of the scheme assets is immaterial. If this is not the case, why would an uneven regulatory playing field be created? It isn’t -these are two different playing fields.
  • 7.4              If CDC schemes are to be used for Automatic Enrolment purposes, the default option would be subject to the 0.75% p.a. Charges Cap.  The management fees for many less liquid assets are not compatible with the Charges Cap. True, but so what -there is hardly a shortage of investable assets.