Why consumers need better choices; (explaining CDC to a merchant banker)


My business card bottom left – to remind me I was there!



Yesterday I met a merchant banker, I didn’t know that’s what he was at the time , but he’s subsequently been identified as one by Con Keating, who knows about these things.

We sat in his office which looked down on the Bank of England.  I thought I could wave at Mark Carney and I suspect he would have waved back, it seems pretty clubby in these corridors of power.

At the end of our meeting, we agreed that I would write a brief explanation of what I wanted to change in pensions , especially with regards the choices ordinary people have to spend their pension pot(s).

This is what I propose to send to him, though I may get some comments from you that change my mind!

  Why consumers need better pension choices

It’s assumed that since April 2015, consumers are spoiled for choice – having been granted pension freedoms by George Osborne. It’s true that there is now more choice than in the days when most people had to buy an annuity with their pension pot(s) but the new choices are all hard and there’s no obvious choice that is best – I would like to put that right and so would all Friends of CDC. We would like people with pots of retirement savings, being able to exchange them for a non guaranteed “wage for life” pension delivered from a CDC scheme.

Until recently, the fate of the personal pension was a relatively low policy priority. Relative to the State Pension and occupational pensions, personal pensions didn’t really matter.

That is changing for three reasons, firstly, the first wave of unit-linked savers are now hitting retirement with their share of the £400bn in non-workplace pensions. These lifetime DC savers will become increasingly important as their ranks are swelled by people taking transfers out of DB schemes. As recently as 2014, only £5bn switched to personal pensions but in 2017 over £34bn passed across.

The second reason is that those people who had historically accrued DB benefits – the mass affluent employees of large employers, are now building up DC pots instead.

The third reason is that 10m new savers are building up DC pots in workplace pensions as a result of auto-enrolment. The scale of contributions per capita is small, but this will increase by a factor of four over the next 13 months as auto=enrolment contributions phase in.

So from being a minor issue, the fate of our DC pensions – will become a major issue and before it does so, policy makers should be clear that there is a clean and efficient way to spend these pension savings, pots must be capable of buying pensions, if the policy aims of pension tax-subsidies are to be achieved. Put bluntly the public purse has paid to ensure that future generations are not a burden on the state and the public purse should get value for money.

And at present, the pension system is providing variable value for the money that is in it. Money accumulating in workplace pensions is now well supervised, efficiently managed and not a problem. However much of the money in non-workplace pensions is not so well managed and is often subject to fee gouging from complex product structures which are so untransparant as to be dangerous.

Worse, the current choices for people choosing to spend their savings are quite inadequate. Advice on drawdown is hard to find, RDR has reduced adviser numbers to around 25,000 and  they are purposed for wealthy clients. The man on the Clapham Omnibus is unlikely to access regulated advice and instead is used “unadvised drawdown products”, the FCA has expressed concern about how these products are used.

Concern is over people drawing down too fast and risking running out of money and those not drawing down fast enough, and denying themselves the fruits of their saving.

We are in a non-functional market where annuities are all but ignored without any natural successor to the annuity emerging.

Into this market, we need a new choice, one that takes on the nastiest, hardest problem in finance and pays people a wage for life, with a minimum of decision making needed from the pension owner.

CDC provides a better choice

There are no CDC schemes in this country yet, though yesterday, the CWU announced that more than 90% of its members employed by the Royal Mail, voted for a CDC solution over either a pure DC arrangement of a DB cash balance plan. They voted for a “wage for life” provided for them by their employer through a contribution fixed as a percentage of their salary. The contribution has been fixed at a level that is expected to provide (together with a fixed employee contribution) a wage for life targeted at around 1/80th career average earnings with CPI inflation linking to that wage.

This model is comparable to a DB scheme – though it is clearly only offering a guarantee on the contribution. For it to work, it will have to deliver to the target pensions and be transparent about how it does so (and why it fails to deliver- when a target isn’t hit). The critical success factor will be in maintaining trust between the CDC scheme managers and the beneficiaries of their management.

The Friends of CDC believe that there is scope among the many pension experts in Britain, to run a number of CDC schemes in a very efficient way with the schemes benefiting from institutional management of patient capital, low investment administration and record keeping costs, high quality governance, good member communications and a sound system of distribution based on well-established actuarial principles.

The greatest strength of such a system is that it is confident in its skin and gives people the right to walk away with a transfer value whether they are saving through the scheme or spending their pension.

How a transfer value is calculated is up to each scheme. Some schemes will use a money purchase underpin , with notional unitisation- some will calculate transfer values on a discounted cash flow basis (as they are calculated for DB schemes). It would seem logical for schemes like Royal Mail to operate on the latter basis and CDC schemes that are funded by transfer from other arrangements to grant transfers (and pensions) based on the timing and incidence of contributions received. Some schemes may operate on both basis (operating a money purchase underpin for voluntary contributions and a discounted cash flow CETV where there is a salary related target pension on offer.

Detail such as this, is currently being discussed by Royal Mail and the DWP, who have expressed an interest in facilitating a scheme for the postal workers with options for other types of CDC scheme to emerge over time. We do not know how long it will take to write these regulations or how much scope they will offer. However, there is considerable expertise from lawyers, actuaries, investment managers and retail advisers available to the DWP policy team involved and there is quiet confidence that rules will be available sufficient for the CWU to recommend it to their members.


Moving the market

What is needed is for there to be second movers. NEST are an obvious candidate by dint of size and access to resource, but so are many of the large single occupational schemes with more mature membership and a commercial reason for ensuring members have a default decumulation option which allows them to retire in confidence. Other workplace pensions are showing interest in the CDC model though the commercial or societal imperative for a “DC upgrade” is not so compelling,

In the opinion of the Friends of CDC, there is urgent need for an improvement in the options open to consumers with DC pots – especially with pots that need to be spent.

The biggest market for CDC may not be with large employers , but with the millions of disassociated savers with non-workplace pension pots which need a better home than they have today. Aggregating these pots together to buy a decent wage for life as rights in a CDC scheme , could and should become BAU for those struggling with freedom and choice.

We are not that far from achieving this vision of CDC. With the help of senior merchant bankers – we might just get this over the line!


Looking down on the Bank of England!

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in CDC, pensions and tagged , , , , , . Bookmark the permalink.

7 Responses to Why consumers need better choices; (explaining CDC to a merchant banker)

  1. John Mather says:

    “This model is comparable to a DB scheme – though it is clearly only offering a guarantee on the contribution”

    Is this not where DB went wrong, the reality is that the promise to be based on final salary relied on the sponsor to make up for the shortfall when one or more of the assumptions proved to be wrong. They were trusted by employees to do this.

    Sponsors have found a way to reneig on the obligation and few new DB arrangements are being set up.

    Now the advisers who were running these failed promises need to find new employment when in reality all that is needed is to increase the contribution rate on auto enrolment. Members rightly don’t trust the companies to responsibly act for the individual. State sponsored admin companies are already in place to do this, comrade.

    But then one needs to follow the current fashion to ban any fee out of a fund, so no spreads no churning no lawyers no fees, even contingent ones, paid for by the fund and an excell spreadsheet with discounted cash flow which make the actuary redundant.

    We seem to get a plan for the next 20+ years of pensions about every seven years so no plan ever gets to maturity the IFS talks of NI rising substantially to maintain the state promis to current pensioners

    If only the level of financial literacy were better in the U.K. if only the economy were expanding we are now ninth (on a PPP basis) in the world behind Brazil, India, Indonesia and Russia

    I fail to be convinced by the proposed Alchemy but it does kick the can down the road and the ivory towers can pay the rent a little longer.

  2. henry tapper says:

    John – aren’t you expecting a bit much of people? It’s one thing to be auto-enrolled into a scheme but another to convert your pot into pension. It’s been described as the hardest nastiest problem in finance. I really don’t get your point about advisers, can advisers manage individual drawdown for half a million people moving into retirement – not individually no – but collectively – we have a chance. And in case you think this is a great new business conspiracy, I have absolutely nothing to gain from CDC right now – or in the foreseeable future – except perhaps the satisfaction of having somewhere to put my personal pot!

  3. John Mather says:

    Henry surely CDC is another fudge The world is more Darwinian in reality and the sooner people take personal responsibility for their own income beyond work the better and maybe then financial advisers would be unnecessary. To do this we need simplified legislation and some honesty if the pattern is NNT, for example, why is the law distorted to support the Gilt market?

    • henry tapper says:

      I can accept the word ‘fudge,’ but resent the use of ‘honesty’ . This debate is happening openly and you are free to say what you like- but what is dishonest about our position? I sense you are playing on my better nature – if you continue to imply dishonesty, I will block you John.

  4. John Mather says:

    Henry it is not a personal attack. Nor am I questioning your honesty. The basis of
    Pension contracts was always encouraging saving by deferring the tax point so no tax on input, no tax on growth but taxed (apart from a commencement lump sum) when used as income.

    Now we have a lifetime allowance above which a significant additional tax is paid and Brown taxed dividends in schemes. Breaking the promise on existing schemes is …..what?

    The recent steel case allowed a very rich trading group to reduce the obligation to members. Members with little knowledge of pensions other than it was a “Gold plated promise” not to be given up so members lost faith and trust in the promise.

    This left them vulnerable to a few vultures Perhaps you will help me to find a word to describe this sort of behaviour but does not offend your sensitivities

    Having recognised the uneven treatment in these pages, having all advisers tarred with the same brush as the vultures yet not supposed to be offended I voluntarily withdraw from the exchange. I thought the objective was to restore faith in pensions, I will not trouble you again

  5. Danby Bloch says:

    Henry – it might help to explain what a CDC scheme is and how it works rather more clearly. You might then be able to spend less time on the inadequacies of the alternatives. I feel sure your merchant banker would like a shorter less discursive message.
    I like the CDC idea in principle, but it does sometimes seem a little like a giant with profits policy – and appears to share some of its weaknesses. ‘Trust me; I’m an actuary’ may play well with some folk – but it might not be universally accepted in these times of greater transparency.

  6. henry tapper says:

    I’ll add a paragraph at the beginning this morning Danby

Leave a Reply