It’s great when you wake up – turn on your phone and get a really great couple of messages! This is what happened this morning to me
Last night John Ralfe had been asking me where I felt CDC would bring down the “ongoing charges figures” (OCFs) . I’d pointed out the economies that can be driven out through disintermediation (cutting out the middle man) and John had properly pointed out that most of these have already been captured by NEST. It’s true that NEST and People’s and a few other workplace pensions are amongst the best value DC savings schemes in the world.
But in that phrase “savings scheme”, lies the problem. These workplace pensions are not “spending schemes”, you cannot spend your NEST or People’s Pension using NEST of People’s Pension. NEST has put forward a way they could help people spend their NEST savings – but even that outsourced the mortality problem to an insurer, NEST’s ambition has never been to provide a mutual insurance against living too long. NEST’s in retirement solution ended in the purchase of an annuity.
At this point, John might have thought that I saw saving in NEST and spending through CDC as mutually incompatible. I don’t and would have made that point – had not two respected friends got there before me!
“Group Self Annuitisation” or “Cooperannuation” as I’ll call it to myself, is the application of a CDC back end to a DC front end. It does indeed sound clumsy, but it may be the way forward. It looks like it might happen not just in Britain , but in Australia, and from Falk in Holland.
There are two reasons why I think this is “the other way of doing CDC” and the way that CDC will most likely develop after Royal Mail opens the door.
Firstly, as a way of saving for retirement, DC is working well. Why would you want to swap something that works well for something that is fraught with communicative risk? Answer – you wouldn’t. Let DC accumulation lie. But DC decumulation is a dog’s dinner, a real mess. There is no accepted way of spending the money, some favour drawdown, some annuities, there are some who will just cash-out and pay the tax. Bottom line – there’s no default.
But people like defaults, especially when they are dealing with the nastiest, hardest problem in finance – providing yourself with a wage for life pension! CDC offers a way for people to swap accumulated cash for pension without having to buy an annuity.
Secondly, the most problematic idea behind Royal Mail’s CDC proposals is the “target pension” and the published accrual rate. This is all well and good in a controlled environment like Royal Mail where there are strong unions and a workforce used to defined benefit mumbo-jumbo. But elsewhere, people are as likely to understand the language of actuarial accrual that underpins Royal Mail’s scheme structure, as they were to understand SERPS/S2P.
If people don’t understand, they are likely to jump to wrong conclusions and consider CDC as guaranteeing them things in the way that SERPS/S2P and DB guaranteed them things.
The Cooperannuation concept – allows people the personal ownership of their own savings pot – with the benefit that gives them as they see their savings grow. It gives them a much better view of the projected pension (a view based perhaps on current exchange rates between cash and CDC pension) and it gives them a default when they come to retire.
Clearly my and Jeremy and Falk’s concept are at an early stage of development, though it sounds like there is modelling on this in Holland and Australia. However, the rate of exchange between a DC pot and CDC pension need not be complex – especially if it is clear to everyone that buys into “group self-annuitisation” that this is a collective endeavour and income can go down as well as up.
I wrote yesterday about the need to stress again and again that if you aren’t getting guarantees, you’ve got to be told that at least 26 times!
As a corollary to that, I’m making it clear to myself that there must be an opt-out of the default before the button to self-annuitise is pressed! In my opinion, that option should be maintained throughout the period in which you’re in group self-annuitisation (or getting your CDC pension) as I think we’ll call it!
This last point is controversial and needs to be tested. My personal belief, one that Con Keating backs up with data, is that most people who opt-out of collectives, do so because they think they can do better themselves. These are the people who are likely to live longest. They pay for the people who opt-out of collectives because they know they have short life-expectancy.
It seems to me that the use of group self- annuitisation – or CDC decumulation – or a non-guaranteed wage for life, is where CDC will bring most benefit.
I see “full CDC” as employed by Royal Mail as having limited application, not just because DC accumulation isn’t broken but because DC decumulation is!
So I see many DC plans wanting to take on board a CDC back end (A DC upgrade) if you like and I see CDC back-ends being a lot easier to explain than full CDC plans.
If a CDC back-end was available for the money I’ve saved, I’d be more than interested.
“Limited CDC” is not a great marketing phrase – but it will do for now. I’d be interested in any feedback on this idea- either in comments, on social media or directly to me at email@example.com