“CDC could solve freedoms issue”-Boulding

Scanning the depressing progression of fake news on my linked in timeline, my eye was caught by a very odd post indeed.

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There’s a lot going on here and I decided to probe the link to what Adrian is saying. 

What Adrian was actually saying was that “CDCs could solve freedoms issue. Ironically we had a “fake headline” but “real news”!



As regular readers know, I am a fan of CDC and – should I live so long – will  transfer my retirement savings into a CDC scheme run by NEST or Peoples Pension or Smart, or Salvus or one of Adrian’ Boulding’s other employers – NOW pensions.


Quoting Adrian

“without sound budgeting, even the largest lottery winners can end up penniless”.

I do not want to spend my retirement savings too soon, or not at all – I want my retirement savings to last as long as I do and I’m prepared to join others in a collective arrangement to make that happen.

So it is great to see someone with a much bigger brain than mine recognising that CDC need not be about employers trying to wriggle out of DB obligations , but about solving a very real retirement problem that is besetting a high proportion of people winding down from work right now.

We know all is not well with pension freedoms when the latest Financial Conduct Authority Data Bulletin, published in September 2018, tells us that more than half (51 per cent) of all pension pots accessed for the first time between October 2017 and March 2018 were fully cashed in.

And most of the resulting savings end up in personal bank or building society accounts offering low interest rates. How will the ex-holders of the 757,927 pensions so far fully cashed in since pension freedoms fare 15 years from now, particularly those who seized control over seemingly life-changing amounts of money from large defined benefit pots?

An opportunity to put things right

We know that a high proportion (the FCA estimate around half) of the transfers out of Defined Benefit pension schemes in the period since April 2015 should not have gone ahead. There are two reasons for this.

1,   The first relates to the sum on offer – the CETV – was inadequate to meet the expectations of those transferring. I heard yesterday from a retired steel-worker that of the 8,000 BSPS CETV transfers – over 450 were transferred in the months leading up to March 2017. Transfers made pre March 2017 were typically only 60% of the value after March when a new discount rate was applied. What this means is that these people missed out on around £150,000 a person – compared to what they would have got – if they had waited.

I put it to anyone who is thinking straight that these 450 people were not acting in their best interest. Infact they were being advised against their interest.  How could transferring away from a collective pension scheme at 60% of the market value  have been in their interest?

2, The second was that there was no suitable alternative proposed  to the pension given up.

I have know doubt that many of the 200,000 or so people who have transferred  out over £60bn of money are amongst those who have either fully cashed in their pot or stripped out the tax free cash and are seeing the rest of their money exposed to the markets and plundered by high costs and charges.

The solutions I saw proposed to steelworkers ranged from an investment into a with profits fund (typically Prufund) to a speculative punt on Active Wealth’s Vega Algortihm.

The steelworkers I spoke to had no understanding of the products used to take their money and did not have the financial capability to manage the complex decisions they were needing to take around the management of their pot.

Putting things right

If 100,000 of the 200,000 people who transferred shouldn’t have – what can be done for them?

They cannot go back into the schemes from which they came. I don’t think there is appetite for doing that again.

But they can be accommodated in wage for life CDC schemes run as sections of master trusts under the oversite of experts managing pensions in an effecient way.

This can only happen if we have the legislation put in place for Royal Mail and that that legislation offers the opportunity for second movers like NOW and Peoples and Smart , Salvus and NEST.

Because whatever reservation people may have about CDC, it has to be a better solution for those 100,000 people who have pension pots rather than pensions – and shouldn’t have.

I totally agree with this statement from Adrian’s article

The benefits of CDCs are evident: members get a clear picture of what pension to expect, with regular payouts from their scheme. And unlike traditional final salary pension schemes, those payouts are not affected if your employer goes under. Furthermore, you cannot over-draw on your pot unlike income drawdown policy holders.

The first priority is to deliver on the agreement reached between management and unions at Royal Mail. As soon as the Royal Mail CDC scheme is operational and the threat of a postal strike over pensions is averted, the government will be able to open up the exciting new world of CDC schemes to other players.

Better budgeting

Adrian is brilliant in linking the concept of a “wage for life” to the societal problems identified by the Government’s own research

Knowing precisely how much we have coming in means we slowly get better at managing our costs in line with virtually static monthly incomes. So, we should not be as alarmed as many were with the 2016 Money Advice Service research study that found that 16.8m people of working age in the UK had less than £100 of accessible savings.

If you think a little deeper about that statistic, it suggests that the majority of workers have a finely-honed ability to manage their spending accurately between pay cheques. Watch a parent out shopping with their kids and you will see it in action as they say, ‘Ask me again when I’ve been paid and maybe you can have that’.

So, what we need to deliver to many of the 16.8m captured by the MAS research is a monthly retirement income that is predictable and will last their whole lifetime.

Collective investments

Adrian is also right to focus on the long term advantages to society of having one great big pot with an infinite time horizon – the vision for a CDC investment strategy

CDC lifecycle

The yellow box gives us the opportunity to invest CDC for the long-term

in the sort of real assets that long-term pension funds should hold, like infrastructure projects for improving roads, bridges, schools or railways, as well as in equities and property development.

The trustees managing the CDC fund will share out the spoils in a collective manner, organising the cross subsidy between those who live long and those who die early, spreading costs over both large and small pots, and smoothing out the short-term ups and downs of market prices.

The normal commercial dynamics do not apply in schemes managed by trustees. While a purely profit-driven approach pressures the managers into offering the customer a little less and charging them a little more for it, trustees have a duty to protect the members’ interest and to ensure that the scheme managers are properly following the trust deed and rules. I have sat in many trustee meetings and seen them spend money on members, when a purely commercial approach would have been to cut back.

Financial Backing

I had originally conceived of what Adrian calls a “later life replacement income” and I call a wage for life scheme, as a standalone entity. But Adrian is smart enough to cotton onto the fact that master trusts with authorisation have a financial strength to gestate CDC as part of a wider savings and spending strategy.

The importance of having a ‘capital adequacy’ buffer becomes apparent when what yesterday’s economists thought was a temporary market downturn turns out to be a permanent correction. In these cases, CDC scheme trustees could find that they have reduced payments too late – as happened in Holland. In this instance, the balance can either be paid for from the capital buffer or from future new entrants.

But with a financial backer fresh capital can be raised, averting this scenario from playing out in tough times like we saw back in 2008-09. Of course, capital buffers have to be paid for, so the reward mechanism for the scheme funder can be built into the rules and honestly managed by the trustees.

Purists will hate it  – (and I look forward to a call from Con Keating later this morning) but Adrian is right. For us to have CDC schemes , there needs to be infrastructure and sufficient resilience within the scheme to ensure that pensions are paid, Sometimes a CDC scheme may indeed need resource to external backing and that backing will need to be repaid.

However, I do not see the handing over of the management of CDC schemes to commercial organisations (as opposed to pure mutuals) as disastrous. As with so many parts of our society, a pure mutual (such as Royal Mail) could run alongside a commercial master trust – both aiming to provide those who prefer collective wage for life solutions to annuities or drawdown , with a third option.

Adrian suggests that people should make such choices with the help of advisers and I am sure that that would be the best way for many people. But 94% of us are not currently paying for advice and I suspect that most of the people who would use CDC would do so as a continuation option from the workplace pension they were already in.

The questions I hope people will be asking of their workplace pension provider in future will be about the at retirement options they offer – I consider a wage for life scheme pension offer (using CDC) will prove very attractive,

CDC solving the freedoms issue

I am very glad to have found in Adrian Boulding, someone who shares my vision for CDC as a wage for life solution for people who cannot make up their minds. I am one of those people who wants a simple solution and I know there are many like me

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The wait and sees and the DIY managers

Those who are DIY-ing drawdown and those waiting to see if something better comes along are the principal market for CDC as a wage for life. I think we represent about 50% of those approaching retirement , suggesting that CDC could become very big very quickly.

But to do so, it needs people with the vision of Adrian Boulding , Kevin Westbroom and Hilary Salt to be joined by many more who are prepared to knuckle down and make this happen.

We need CDC to pass into law and I’m heartened to hear that we are likely to have a Queen’s Speech where the Pensions Bill (containing CDC legislation) will be set before the house on October 14th.


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 “CDC could solve freedoms issue”-Boulding

  1. Brian G says:

    To make CDC more attractive there should be different shapes of the wage for life. Single people with no dependants should have the option of a wage based on a single life with no guaranteed period and people with partners should have the option of 100per cent joint life rather than the traditional 50 per cent option. Pension provision is still primarily in the hands of males. Many of them would give up more of their own income to provide an equal income to their partner if they die first. There should also be lump sum death benefits equivalent to capital protection which could be part of the menu of options in exchange for a lower wage for life. Crap death benefits are a large part of why people don’t buy annuities so give people the chance to take advantage of the purported extra returns on CDC Long term investment strategies by offering wages for life with better death benefits than traditional dB schemes.

  2. con keating says:

    This discussion of capital buffers and external financiers for CDC schemes is simply nonsensical. There is no well-defined liability for external capital to support. We know that at all points in time the amount of pensions is limited to and by the value of the scheme’s asset portfolio. The idea of using subsequent contributions to subsidise past errors is one certain way to make these (or for that matter any) pension scheme unattractive to new entrants.

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