Michael Johnson’s letter to Frank Field & Co on CDC (reproduced in full here) was a real disappointment. I had expected more; a new and closely reasoned critique, passionately believed, perhaps. What I got was a tired and repetitive rehearsal of many concerns previously raised and answered, and a lot of scaremongering. It was most surprising to see that it claimed to be a dispassionate exposition, when the subsequent language was emotive in extreme.

According to Michael, the advocates of CDC are a

“small cabal of pensions industry self-interests (predominately consultants and lawyers, perhaps seeking to replace their diminishing DB income streams)”

The alternate to CDC proposed, in an incomplete, and rather loose, hand-waving manner, appears to be placed far behind many of the possible designs for CDC which have been proposed and discussed, from a cost and efficiency standpoint. Michael is a fan of with-profits policies; strong and assertive governance will resolve their well-known woes. Yet, one of the key elements of a well-designed CDC scheme is that it benefits from both risk-pooling and risk-sharing among members, which is not a feature of any with-profits policy. There also appears to be a blissful ignorance in his critique of the difference between cross-subsidies and risk-sharing.
Michael has a concern, expressed frequently, that a scheme may over-distribute to current pensioners at the expense of members not yet pensioners. The problem is hardly new as even a cursory reading of the “tragedy of the commons” literature (Hardin, Ostrom, Stiglitz, et al.) would reveal. The solution incidentally is simple. It is, at any point in time, to pay pensions only to the extent that they are funded; to treat the solvency ratio as if it were binding.

This of course is the position faced by an individual, full exposure to the volatility of their asset portfolio (and overconsumption today of assets held for the future their only option). This is where the collective nature of CDC comes into its own; it introduces a second option, risk sharing among members which is equitably organised among them, and therefore sustainable.

But Michael seems no fan of collectivism of any stripe.
Of course, the letter takes the usual cheap shot of asserting that other than Royal Mail there are no companies interested. In fact, there are already many more who will be investigating CDC once it is permitted to exist and be offered. It is a matter of public record that back when the Defined Ambition legislation was being written and the prospect of CDC seemed imminent and tangible, there were more than 20 employer sponsors interested.

In addition, it should be recognised that CDC schemes may exist independently of any corporate sponsor, perhaps organised as master-trusts.
Rather surprisingly, Michael demonstrates a lack of understanding of innovation processes, asserting: “ordinarily, successful product innovation is customer-driven”. As has been noted many times before, this approach results in improved horses but no motor cars. Many, arguably most, innovations are, of course, introduced, built first, in hope and anticipation, not reaction. The need for decumulation innovation is clear, a belief shared by the authorities, but need does not necessary translate into demand. However, one thing is clear: if we don’t build it, they cannot come.
The letter contains a number of misrepresentations, such as the idea that Freedom and Choice transfers will either be not possible or prove extremely complex, when neither of these is true.

There is much emphasis on creating an atmosphere of uncertainty and risk surrounding CDC, to be approached with much apprehension and dread. The letter is even structured as a listing of risks. Any experimentation and innovation are then much simpler to depict as irresponsible and dangerous.

The letter elevates some remote and highly improbable possibilities to likely events; millennium bug hysteria at its most extreme. Michael would do well to understand that the absence of evidence does not constitute proof that precautionary action needs to be taken.