For the avoidance of doubt – this is a blog from Con Keating.
A J Bell issued a commentary on CDC ahead of the budget. It was riddled with error, and self pleading.
Take: “CDC works in a similar way to the old-fashioned with-profits policies that were popular in the UK in the 1980s and 90s. This means that rather than each member having their own individual pot – as is the case with conventional DC – all assets are pooled together and invested collectively.”
CDC does not work in the manner of “with profits”. They involved discretionary subsidy, CDC operates on the basis of equitable risk-sharing. Each member does have an individual pot, their equitable interest in the asset pool.
It gets worse: “Advocates of the schemes argue that by pooling investments, members can share risk between them and, they argue, potentially benefit from higher returns. However, the Government itself has previously noted some of the more extravagant claims of CDC backers – including that returns could be 50% higher than individual DC – should be treated with extreme caution.”
No-one claims that by pooling investments risk is in some way shared; the risk of the asset portfolio is common to all members. Government sponsored research has in fact confirmed that the average returns to CDC investment should be greater than those of the average traditional DC arrangement.
The hole gets even deeper: “The primary benefits of CDC – the ability to hold risk seeking assets over the long-term while paying low charges – are already available to individual DC members.”
The primary benefit of CDC is in fact equitable risk-sharing, which lowers the dependence upon and sensitivity to the vagaries of financial markets. Individual DC members may be able to invest for the long term, but they aren’t – they are invested in funds which seek to maximise asset value immediately.
“Individual DC members also benefit from flexibility over how they spend and invest their pot which would not be available to CDC members unless exit penalties were imposed.”
The full flexibilities of Freedom and Choice are available to members, with transfers taking place at the net asset value of a member’s equitable interest. But this is the nub of the objection here; they see CDC as a threat to their DC decumulation business income.
“That said if the Government believes there is demand from employers and savers for CDC it makes absolute sense to build a framework to support them. This needs to ensure members benefit from the same levels of governance, transparency and fairness that exist in the conventional DC market.”
In fact, in these regards CDC schemes will operate to a higher level than individual DC.
And finally: “It will also face challenges in ensuring the inherent intergenerational conflict that exists in CDC schemes are managed.”
There is no inherent intergenerational conflict within CDC schemes, while there most emphatically is within DC funds – young members should prefer low asset values while older members should want maximal, and of course the fund manager’s incentives are to maximise those values, and their fees.