Con Keating sets about John Ralfe’s CDC submission

John RalfeReview of: Written evidence from John Ralfe Consulting

This is my (Con Keating’s) review of and commentary upon the submission made in response to the committee’s call for evidence. It follows my precedent of verbatim quotation in black typeface with my commentary in red.

There is precious little evidence contained within it. Much of the submission is concerned with attributing spurious motivations and intents on the promoters of CDC. There are then extensive attempts at demolition of these bogus motivations. It exhibits the peculiar phenomenon that I have previously described as recrudescent Ralfe syndrome. Less than ten percent of this submission is factually accurate or relevant.


My conclusions are:

1 The underlying economics of “CDC” pensions is flawed

As we will show below, it is this submission which is flawed.


1a The claim that average CDC pensions are 30 to 40 per cent higher than

DC, is faulty economics, based on the idea that investment risk declines

over time, so there is a (sic) an equity “free lunch” for long term investors.

It is based on no such idea. It is based, in large part, on the longer term over which investments will be held. There are further sources of higher returns from CDC than traditional DC, notably the objective function of the fund.


1b The higher expected return of equities is not a “free lunch” or a “loyalty

bonus” for long-term investors – it is just the reward for the risk of

holding equities.

This is an interesting theoretical assertion; unfortunately, one for which there is no empirical support. Equities may be held collectively in a manner unavailable to the individual, whose pre-occupation is with annuity purchase or capital decumulation as income.


1c If holding equities for the long run really does generate higher average

returns, with negligible risk, why don’t banks provide guaranteed equity

outperformance, for a modest fee reflecting the “modest” risk?

No-one has claimed negligible risk. As for his question, the reason is simple: this is not the business of banking, just as the provision of fish and chips is not the business of banking.


1d A CDC plan can transfer investment risk from one member or generation

to another, but is cannot reduce it. If one CDC member takes less equity

risk, another member is taking more risk.

This is ridiculous. It is fallacious; twice over. Classic recrudescent Ralfe syndrome. A CDC fund is a common fund to which all members are exposed. All are taking the same investment risk at any point in time.


2 Lobbyists should explain the precise nuts-and-bolts of CDC

This is again nonsensical. It is sufficient to describe the functional relationships and recognise that within those there are many details which may be handled in different ways. The variety of such designs is a hallmark of the potential flexibility of the CDC approach.

2a Although CDC has been discussed for several years it is not a clearly

defined-term, but means all-things-to-all-people. No one has provided

precise nuts-and-bolts of how any CDC structure would work in practice.

There are in fact a number of models which have been described in detail and rather a lot which exist in practice outside of the UK.


2b Because CDC is about “sharing” or transferring risk from one individual, or

one generation, to another, it is crucial this risk transfer mechanism is

scrupulously fair and transparent, so those bearing the risk also receive

the reward.

This is the first point of agreement; but hardly one which is new to the world of collective and co-operative institutions. It was no accident that the Rochdale pioneers named themselves: the Rochdale Society of Equitable Pioneers


2c CDC “intergenerational risk sharing” seems to requires successive

generations of new members, each able to pay the previous generation, if

necessary – suspiciously like a Ponzi scheme.

He seems to have invented an “intergenerational risk sharing”. CDC schemes are member mutual institutions, collective co-operatives. It is a funded pension arrangement; there is no reliance upon the contributions of later members to discharge current pensions payments. Clearly, he does understand what constitutes a Ponzi scheme.


3 Lobbyists should explain how CDC would be regulated

It is in the name – as collective defined contribution. They are just DC schemes organised collectively rather than individually. How foolish we were to believe that people would read the name as being descriptive.

3.1 Robust and transparent regulation of a new and untested savings vehicle

is crucial to make sure CDC plans do what they “say-on-the-tin”.

There is no new savings vehicle; this is a collective investment fund. The last time I looked there were tens of thousands of them. What may be new is the way in which members allocate among themselves their equitable interests in the fund, and that is a matter for members, not regulators.


3.2 Rather than a “DIY” valuation left to trustees and actuaries, CDC plans

should be required to publish a quarterly funding statement showing the

value of “target pensions”, on a prescribed bond basis, and taking asset

allocation into account.

This is confused to the point of incoherence. These are DC arrangements – a member may expect to have available, in near real-time, the net asset value of his or her interest and the income equivalence of that under scheme rules. Neither the fund’s asset allocation nor a “prescribed bond basis” whatever that might be are relevant.


3.3 There must also be strict rules on dealing with a shortfall by cutting

“target pensions”, including pensions in payment.

No. Cutting pensions in payment is the last resort. It takes place only when risk-sharing possibilities have been exhausted.


4 Dutch CDC experience is not encouraging for the UK

I will not comment here on the Dutch experience as I have on many occasions cautioned that it is a better guide of what not to do than template for a UK CDC system.

4a Dutch CDC plans were set up as DB, but when the Courts ruled that

employers had no legal liability for deficit contributions, things were

fudged and “DB” pensions morphed into CDC.

4b Although Dutch CDC plans are tightly regulated there has still been a

cross subsidy in recent years from younger employed members to older

retired members. Younger unhappy members cannot vote with their feet

by leaving – workplace pensions are compulsory – and there have even

been street protests.

4c The Netherlands is moving away from collective CDC pensions, with many

Dutch experts recommending individual DC accounts and individual asset

allocation, with individual property rights.

This arises from the intrinsic flaws built into the Dutch version of the CDC model. It is always dangerous to shift conclusions from the specific to the general.


“CDC” seems to offer an easy solution to a difficult problem, but is flawed in

theory and practice.

An assertion lacking any supporting evidence or substantial argument.


Rather than wasting time trying to develop CDC we should improve the

existing large-scale DC pensions the UK already has.

This demonstrates a truly bucolic ignorance. CDC schemes are improvements on existing DC arrangement.


We have removed a section of puffery laying claim to expertise in pensions.


1 Introduction

1.1 In recent years some UK investment experts have been pushing for the

introduction of so-called “CDC” pensions, like the Netherlands. These aim

to “bridge-the-gap” between traditional defined benefit pensions – with an

employer guaranteeing a pension for life based on salary and years of

service – and defined contribution pensions, with each individual taking

their own investment and longevity risk, and with no guaranteed pension.

1.2 Unlike DB or “Defined Ambition” pensions, which have also been

discussed, a CDC pension would have no employer guarantee. Rather it

would set a “target pension”, to be raised or lowered depending on

changes in the fund’s overall level of funding – assets versus liabilities –

including changes in longevity. Assets would be held collectively, on

behalf of all members, rather than individual accounts, like DC.

A member’s equitable interest is well defined, and with that their claim on scheme assets at any point in time.


1.3 CDC lobbyists claim this “middle-way” can offer pensions 30 to 40 per

cent higher on average than DC, with fluctuating asset values smoothed

through some form of “intergenerational” risk sharing.

CDC is no “middle way”. It is a response to the incompleteness of DC as a pension. There is no “form of “intergenerational” risk-sharing, though there is both risk pooling and sharing among all members at any point in time.


1.4 My comments cover:

– Where does the extra return of 30 to 40 per cent v DC come from?

– What are the precise nuts-and-bolts to ensure CDC fairness?

– What would be the precise regulation of CDC?

– What is happening to CDC in the Netherlands?

1.5 I then address the specific questions raised by the WPSC

2 The underlying economics of “CDC” pensions is flawed

2.1 A CDC plan could certainly have lower transaction costs than the most

expensive DC – economies of scale, auto-enrolment and passive-only

investment costs – compounding over years to generate a higher pension.

But existing arrangements, such as NEST can already provide lower costs.

The objective function of a traditional collective fund is to maximise asset values at all times. The objective function of a CDC fund differs: it is to equal or surpass the implicit contractual accrual rate associated with the target pensions awarded, on average. The “on average” relaxation is admitted by the risk-pooling and sharing among all members. The term is longer encompassing the period spent in retirement.


2.2 Lobbyists argue the higher CDC pension really comes from

“intergenerational risk sharing” with savings paid into a collective fund,

not individual accounts.

We do not. It is the longer investment term which accounts for a significant proportion of the excess performance.


Because a CDC plan has a longer time horizon than any single individual,

it can take more investment risk – a higher proportion of equities, and a

lower proportion of inflation-protected bonds – to generate higher

investment returns and a bigger pension.

This is simply not being said. It is an invention of the author – a bogus claim. If anything CDC funds will tend to have lower risk than traditional DC fund.


2.3 This claim is based on standard historical modelling of the volatility of

past equity returns, showing the probability that equities will earn less

than the risk-free rate bond rate decreases with time – the familiar

argument encouraging long-term pension savers to hold equities.

Since a collective CDC plan has a longer time horizon than any single

individual, this would allow it to take more equity risk, to generate higher

average returns, and a higher pension.

Neither of these claims is in fact being made.


2.4 This argument assumes that if the time horizon is long enough, equities

will always outperform bonds – so a collective CDC pension, with new

members joining, can absorb the risk of holding equities in perpetuity. No such assumption is being made. Bogus analysis heaped upon the bogus critique.

The heart of the CDC argument is the belief that there is an equity “free

lunch” for long term investors.

This is a non-sequitur.

2.5 But the higher expected return of equities over inflation-protected

government bonds is not a “free lunch” or a “loyalty bonus” for long-term

investors, but is just the reward for the risk of holding equities.

This is a man who would buy inflation protected bonds – when their price assures us of loss of real purchasing power – how is that consistent with any common-sense notion of investment.


2.6 The proper measure of long-term equity risk is not the volatility of past

equity returns; rather it is the cost of buying insurance against

underperformance versus the risk-free return – a “put” option on a stock

market index. If risk really does reduce over time, the cost of equity put

options should fall the longer the option period.

We are doing well here – he has introduced a risk-free rate (a glorious theoretical abstraction frequently seen alongside golden unicorns) and a stock market index. The assertion is that the supporters of CDC argue that risk reduces over time, but we have never said that. It is another bogus construction.


2.7 In reality, the cost increases the longer the option period, reflecting

increasing, not decreasing risk. The theoretical price based on a standard

option pricing model, and actual prices charged by banks are about 25 per

cent for 10 years and 30 per cent for 20 years.

2.8 The argument from option pricing “insurance” was first made by Prof Zvi

Bodie in 19941, and has been discussed many times since, in both the

academic and investing literature.

2.9 If holding equities for the long run does lead to higher average returns,

with negligible risk, why don’t investment banks or insurance companies

provide guaranteed equity outperformance for a modest fee reflecting the

(supposedly) modest risk?

If the reader really wants to understand the relationship between safe and risky assets, I would recommend a 2018 US Federal Reserve publication: The Rate of Return on Everything, 1870 – 2015. It does not support Mr Ralfe’s contentions.

2.10 A collective CDC pension could transfer investment risk from one member

to another or from one generation to another, but it cannot reduce the

overall risk of holding equities. If one CDC member takes less equity risk,

this must mean another member is taking more risk.

This shows another fundamental misunderstanding of the properties of risk as well as the attributes of collective funds.

3 Lobbyists should explain the precise nuts-and-bolts of CDC

3.1 Although CDC has been discussed in the UK for several years it is a long

way from being a defined-term. This is a recrudescence see my earlier comments.

There may be different CDC structures, but so far no one has provided

precise nuts-and-bolts of how any would work in practice.

There are many examples around the world and there have been a number of different model designs proposed but as was noted earlier, it is unnecessary.

3.2 Because CDC is about “sharing” or transferring risk from one individual, or

one generation, to another, it is crucial that this risk transfer mechanism

is scrupulously fair and transparent, so those bearing risk also receive the

reward. The mechanism must avoid one group getting a reward, without

bearing and risk, at the expense of another group, bearing the risk, with

no reward.

This is simply saying that the scheme must be equitable in the manner in which members are treated. It is one of the very few things in this submission with which I agree.

3.3 In particular, if the risk transfer rules allowed contributions from younger

members to subsidise those already drawing a pension, younger members

would simply leave or not join in the first place, and the CDC plan would


Here there is a fundamental misunderstanding. Contributions made for new awards should never be used to repair prior deficits, nor should they be used to distribute surpluses. In point of fact, younger members would find a scheme in deficit particularly attractive to join since they would receive fair value for the contribution and recompense for the support they are providing to pensioners in payment. Incidentally, a scheme which attracts no new members does not collapse; it runs off slowly and smoothly.


3.4 Each successive generation might be prepared to sign up to

“intergenerational risk sharing” if it knew the next generation would, in

turn, also sign up – each generation running the risk of paying an older

generation, in exchange for the possibility of receiving a payment from a

younger generation.

This is a valid concern for unfunded pension systems such as those operated by states, but it is irrelevant in the context of CDC where the risk-pooling and risk-sharing are among members. No private body can bind some future independent person.


3.5 But the first generation in a CDC plan gets a free-ride. It can transfer risk

to the second generation without having taken risk on behalf of an earlier


Again, the risk pooling and sharing in CDC schemes is among members. The author of this submission confuses risk transfer and risk sharing. There are no free-riding possibilities.


3.6 Equally the last generation in a CDC plan faces the risk of paying the

penultimate generation, but, by definition, it cannot receive a payment

from a younger generation. End-to-end the first generation gains at the

expense of the last.

This is simply not true of a funded arrangement. Frankly the analysis here is infantile.

3.7 CDC intergenerational risk sharing only works with new generations of

members, each able to pay the previous generation. So from day one CDC

looks like a Ponzi scheme, which no one would want to join.

The members of a scheme make contributions into the scheme, which pay for their own pensions when combined with investment returns. The risk sharing among members allows the excesses of the market price variability of the asset portfolio to be absorbed and recovered equitably. There is no Ponzi element to this.

4 Lobbyists should explain how CDC would be regulated

It really is in the name. These are DC schemes for which we have perfectly adequate existing regulation. They are collective, a term which is already adequately defined in the Pensions Schemes Act 2015.


4.1 Like any new savings product CDC regulation must be transparent and

robust to win public confidence, and to avoid storing-up future problems.

Dutch CDC plans – recommended as a model for the UK – operate under

strict funding rules.

Dutch schemes have not been recommended as a model for the UK by anyone. Their funding rules are just one of many ways in which they are inappropriate – those rules create excessive and unwarranted uncertainty with respect to pension payments, and operate inequitably among members.

This is not a new savings product, rather it is a well-established form of saving. The only element which is new is the way in which members define their interests in the fund, which differs from the unitised claim of traditional collective funds. It is not as if other methods of defining claims have not been known in the past. A tontine is a collective fund, where the members’ interests are all subordinated to the last person standing.


4.2 Regulation is especially important because, unlike individual DC pots, CDC

members do not have clearly defined property rights over the CDC assets.

This is simply untrue. Members may remove the net asset value of their interest at any time, at their sole discretion.


4.3 CDC regulation would require strict and transparent solvency rules, with

the ability to cut pensions in payment, and, even claw back pensions

already paid, if solvency deteriorated due to poor investment performance

or increased longevity forecasts.

CDC schemes should consider cutting pensions in payment if the scheme assets are less than the total aggregated member interests. But before doing that the scheme’s risk-pooling and sharing rules should operate. It is only when those options are exhausted that cuts should be applied, and then they are applied to all members. As these rules are a matter of agreement among members, which substitute for risk buffers, there is no case for their regulation. There is no potential for wider harm to the community.



4.4 Although it is crucial the 2015 CDC Bill says nothing specific about

regulation. In particular, CDC trustees, advised by actuaries, are left to

decide for themselves how target pensions for all members should be

valued, so overall funding can be measured against the market value of


Target pensions are soft promises made to members. Implicit in those promises are rates of return on members’ contribution investments. This contractual accrual rate, the target rate is the valid objective for investment returns and comparison of the capital value of those claims under those terms with the asset value of the fund is an indicator of the progress to the fund towards meeting those pension objectives. Members will have available to them in near real-time both the capital value and its pension income equivalent.


4.5 This “DIY” approach means there is no objective and consistent

benchmark for CDC members to judge the likelihood of their target

pensions being paid. “Trust me, I’m an actuary” is not good enough as the

basis for a wholly new and untested type of pension.

As described above, there is a consistent and objective method of judging, Indeed, if the net asset value of a member’s interest is less than 100%,say 80%, it is clear that the pension which may be affordably paid is 80% of that “promised”. Of course, the risk-sharing rules will serve to improve on this outcome, should that deficit prevail at the time of pension payment.


4.6 CDC plans should have to publish a quarterly funding statement showing

the value of “target pensions”, on a prescribed bond basis. There must

also be strict rules on dealing with a shortfall by cutting “target pensions”,

including pensions in payment.

This is nonsensical. The author wishes to introduce a meaningless and irrelevant counterfactual into the valuation process ( the ”prescribed bond basis”). See my earlier comments on the point in time at which cuts become necessary.

4.7 The obvious benchmark for valuing “target pensions” is the AA corporate

bond rate, required by IAS19 corporate accounting for DB pensions. To

ensure consistency across different CDC plans the Pensions Regulator

should post the required AA rate, the inflation rate and longevity

assumptions each quarter.

This is a specific counterfactual, and specifically wrong for the valuation of schemes. As CDC schemes may have very different risk pooling and sharing arrangements, it is inappropriate to attempt any common method of valuation.


4.8 A quarterly funding statement would be just a snap shot, which ignores

asset mix – two CDC plans may both be 100 per cent funded, but the

funding position for the scheme with a high proportion of equities versus

long dated bonds will be much more volatile.

It is not in general true that bond portfolios are less volatile than equity. There are many periods, including sustained sequences where fixed income securities have proved more volatile. See the earlier referenced Federal Reserve paper, or any of the rigorous long-term studies of investment performance.

4.9 To deal with this funding volatility, CDC plan should also be required to

“stress test” their assets by applying a “haircut”, which could be that laid

down by the PPF in calculating its annual levy.

This is nonsensical. It is an attempt to import a technique which is appropriate in the situation where there is an external agency upon which there may be reliance and recourse, but wholly inappropriate in the case of a risk-pooling and risk-sharing member mutual. It is singularly inappropriate in a multi-period context; it will result in attempts to provide for risks, when one of the few things that we know about risk is that many more things may happen than will.


5 Dutch CDC experience is not encouraging for the UK

5.1 Although CDC lobbyists point to the Netherlands as a model for the UK,

the Dutch context is very different, and the experience is not


Dutch CDC plans were not originally set up as CDC. Rather they were set

up as DB pensions, with the sponsoring employer committed to making

deficit contributions, but this was challenged in the Dutch Courts which

decided companies had no legal liability for deficit contributions.

In response to this legal ruling this issue was fudged with “DB” plans

transmogrifying into CDC.

A very small number of Dutch schemes were set up as CDC. They have not experienced any difficulty other than situations arising from the way in which they are (inappropriately) regulated.

5.2 Workplace pensions are compulsory in the Netherlands, so CDC plans

have a continuous stream of new members, unlike the UK where pension

fund membership is voluntary.

Although Dutch CDC plans are very tightly regulated there has still been a

cross subsidy from younger employed members to older retired members.

Younger unhappy members cannot vote with their feet by leaving their

CDC plans, and there have even been street protests.

As we have said on many occasions the Dutch system is a better indicator of what not to do rather than being a system we should import to the UK.


5.3 The Netherlands is moving away from collective CDC pensions, with many

Dutch experts recommending individual DC accounts and individual asset

allocation, with individual property rights, but retaining compulsory


Compulsory membership is neither necessary nor desirable for UK CDC.

6 Specific questions asked by the WPSC

6.1 Would CDC deliver tangible benefits to savers compared with other


Although the claim that CDC can deliver pensions 30 to 40 per cent higher

than DC sounds attractive, as explained in section 2, this claim is based

on faulty economics.

Because of this flaw, I do not believe CDC can deliver any tangible

benefits versus DC.

The flaws in the author’s critique were discussed earlier. They invalid his conclusion.

6.2 How would a continental-style collective approach work alongside

individual freedom and choice?

The underlying philosophies of CDC and “freedom and choice” certainly

pull in opposite directions

They do not. Freedom and choice and freely available transfers are available within CDC arrangements where they are a very powerful governance mechanism – exit. They also serve to offer comfort and confidence to members – if I may remove my assets at any time, my risk exposure may be limited or terminated at any time of my choosing.


It may be possible for someone to be in a CDC plan up to the point of

starting to draw a pension, and then transfer all her pension into a SIPP,

and drawdown from this.

Yes – and they may operate drawdown within the CDC scheme, while maintaining the benefits of risk-pooling and sharing.

6.3 Does this risk creating extra complexity and confusion? Would savers

understand and trust the income ‘ambition’ offered by CDC?

CDC would involve extra complexity and confusion which could be

managed properly if the overall advantages were obvious. But since I

believe CDC is a “con” based on faulty economics, then there is no

justification for investing this time and effort.

As had been shown at many earlier points, it is this author’s economics which are faulty.


6.4 Could seriously underfunded DB pension schemes be resolved by

changing their pension contract to CDC, along Dutch lines?

The Dutch Courts ruled that the underlying legal framework of Dutch “DB”

pensions, which were then changed to CDC, did not require employers to

make deficit contributions, so is fundamentally different to UK law.

This means such conversion would be illegal in the UK.

More than that it would be a transfer from pension scheme members to

shareholders and other creditors.

There is no doubt that the law could be changed to allow such resolutions under UK law. It can already be done with informed member consent. Indeed, resolution at insolvency through the PPF is resolution through a CDC scheme, albeit one which is very poorly designed. The complexity of that is obvious for all to see. The open question is not can it be done but should it be. My answer to that would be no. But for more detail on the rationale for that response, see my response to the DWP DB Green Paper.


6.5 How would this be regulated and how would the loss of DB pension

promises to scheme members be addressed?

Not applicable. See 6.4.

6.6 How would CDCs be regulated?

See section 4.

3.4 Is there appetite among employers and the UK pension industry to deliver


I have had discussions with various companies about CDC. None of them

support it, and see it as moving back to DB from DC. One FD in particular

is concerned that the company might have some “moral obligation” to

support its former employees if a CDC went wrong.

Given the author’s degree of comprehension, or rather lack of, this is not a surprising result. It is absolutely clear that there is no obligation on any company to support a scheme. No legal, moral or other liability.


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

No. See section 2.

Here in the best tradition of this submission, the author is again wrong.


February 2018

This appears to have been written after the call for evidence closed.




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 Con Keating sets about John Ralfe’s CDC submission

  1. Charles Pooter says:

    I would suggest that the author has too much time on his hands, to vent his spleen in such a bitter and spiteful manner.

    I welcome debate, which requires differing views. I feel the author is of the view that his is the only relevant one and would attempt a character assassination of any alternate voice. As such, he has lost what respect I had for his undoubted intelligence.

    Henry, I’m surprised that (whilst the author supports your ‘pro-CDC at all costs’ stance) such a vitriolic, one-eyed piece warrants publication on your excellent blog.

  2. henry tapper says:

    Charles, Con is a regular writer on this blog, his views are his own. I am not in the business of supressing either the thoughts or the suppression of thoughts of Con Keating. They are what they are,

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