This morning I should be attending the CDC fringe meeting at Brighton’s Grand Hotel which forms part of the Labour Party Conference. If I can’t – I send my apologies to Royal Mail, CWU and the Shadow Pensions Minister – Jack Dromey who is chairing the event.
CDC is hardly top of the political agenda but it remains one of two matters in the Pension Bill that should be laid before parliament on October fourteenth – the other being the Pension Dashboard.
That it has made it this far is principally down to a deal struck between Royal Mail and CWU which averted a damaging pension strike and has led to some commentators heralding a third way for Britain’s workplace pensions. I think that third way is a cul-de -sac but that CDC is critical if we are to resolve the puzzle of our wanting to freedom to spend our retirement money as we want and our deep-rooted insecurity when faced with losing income in later life.
Why CDC isn’t proving popular with unions
The original concept of a CDC pension assumed that savers would build up rights to a collective DC fund which would be returned to them as a wage for life once they reached the tipping point known as retirement.
Such an idea works well where there are stable workforces that work together, save together and retire in an organised well. Royal Mail is one such workforce but it is unusual in Britain today. Increasingly workforces are fragmented , job turnover high and the concept of retirement is less rigid. Many of us will never see a retirement date.
Where the labour conditions persist to encourage collective provision, defined benefits also persist. Local Government provides our largest ongoing funded DB plans but the scale of provision is dwarfed by the promises to teachers, doctors, nurses, firemen and other public servants that have no fund but rely on the ongoing support of the public. The only large private sector DB schemes still accruing are quasi public – USS and Saul.
Understandably, members and their representatives of these large schemes see CDC not as a help but as a threat to the guarantees that sit within their pensions. Until they are prepared to give up their guarantee of a pension for a guarantee of a contribution, there will be no appetite for CDC from the members of occupational DB plans. Without the support of both unions and employers – it is hard to see CDC being established as a DB substitute.
The lukewarm reception amongst unions to CDC is based on a perception of CDC as being a trojan horse by which employers walk away from all responsibility for member outcomes. I think the unions are right to think this way.
Why CDC isn’t popular with employers
There is little appetite amongst employers to establish CDC as a means of upgrading DC plans along the lines of Royal Mail. Employers will not take on any risk of being perceived as insuring their staff’s longevity by way of a wage for life and – try as we might – those who advocate CDC cannot wipe out the concern employers have that it is they and not their pension scheme who will be the insurer of last resort – if CDC goes wrong.
It is fruitless arguing to employers that CDC is a DC upgrade when there is no pressure from employees to have anything better than what they currently get – DC workplace savings schemes.
No matter how progressive you are as an employer, you would only follow Royal Mail if there was considerable support for CDC from unions and staff. More precisely, CDC is only likely to be delivered though workplace under the threat of industrial action. There are not enough employers and workforces like Royal Mail to make the large scale introduction of CDC as a workplace pension , a reality anytime soon.
Why CDC will only happen when people have had enough.
I predict that the current choices available to ordinary people at retirement are insufficient and will grow increasingly unpopular. Annuities, Drawdown and Cash-Out are all problematic in the way that drawing a scheme pension wasn’t.
CDC’s main virtue is that it is a painless, hassle free way of getting paid a wage in retirement and depends not on IFAs or financial acumen but on rules that – properly followed- should lead to better incomes than can be drawn from any of the options currently available.
CDC’s future is as the back end of DC plans – especially master trusts which bring together large numbers of savers through many participating employers. These master trusts need not act as individual DC savings plans while people are working, they can be converted into DC pot spending plans, when those people stop working.
Put simply, CDC has the potential to be the default at retirement choice for people with money in a DC savings pot.
When people collectively throw up their arms in frustration and point to the paucity of choice in the “freedom of choice” world – created by George Osborne, then it is time that their collective voice is heard . listened to and answered.
CDC and the political agenda
Any politician with a progressive political agenda should be looking at CDC. Royal Mail has opened the door but not to employers. It has opened the door to the large commercial providers that run workplace pension schemes – including its own provider- NEST.
These providers have currently come up with no coherent way of helping people at retirement and still rely on referrals to Pension Wise to dump the problem of what to do with the savings on someone else.
These providers are beginning to see CDC as a commercial opportunity to manage people’s in retirement savings for longer – indeed for ever.
The political agenda for CDC lies in linking supply (these master trusts) with demand- the increasing frustration people are having with converting their pension pots into lifetime income.
Unions would be much better off thinking of CDC as solving individual problems than worrying it might corrode DB.
The Labour Party should this morning be discussing how it can mobilise the silent majority of those retiring today behind the ideas of collectivism inherent in CDC.
There is no reason why political support for CDC as a way of spending DC should not achieve cross party support. The Liberals supported CDC in their previous manifesto and Guy Opperman has given it the green light through getting CDC into the Pension Bill.
But for CDC to become popular, it must be explained to the public as solving a problem. The problem CDC solves is not ” DC workplace pensions” where the saving is going fine, nor DB pensions where the issues of affordability will only be muddied by CDC.
The problem CDC solves is how ordinary people can convert their DC savings pot into a pension. CDC may not be the perfect pension , but it is better as a mass market default than cash, annuity or drawdown.
Once that message has been heard, listened and acted upon, CDC can stand at the heart of the pensions agenda. Till it does, I fear CDC will continue to be discussed at fringe events.