Time for some fresh thinking on CDC

one trick pony


The Pension Schemes Bill is making its way through the House of Lords but now seems unlikely to get Royal Assent before July. If it misses its target and we don’t get an Act till the Autumn, a Royal Mail CDC plan in the spring of 2021 looks harder.

Screenshot 2020-04-26 at 05.52.45

We are at the Black R (as at April 26th 2020)

In the 2 year gestation of CDC  no employer has stuck its hand up and committed to the “whole of life” solution proposed by CWU and Royal Mail for its staff.d

In this blog, I suggest that CDC risks becoming a one-trick pony, unless it gets some fresh thinking. That’s the bad news – the good news is that in this blog, I outline that fresh-thinking so that we can consider applications for CDC, beyond the single employer – “whole of life” model, that is proposed by Royal Mail.

Let’s leave the employer out of it – for the moment.

Some would say that this is a case of “if you build it they will come”.  It may well be that by the time Royal Mail has proved the worth of its CDC schemes, other employers feel that they can build similar schemes, legal templates will have have been published, investment strategies agreed and member communications standardised. Above all confidence will have been established that the modelling is robust enough for people to have an expectation of more value for their money than is achieved through individual plans – what we call workplace and self invested personal pensions.

To suggest that employers, post pandemic – will extend the scope of their financial planning and embrace “risk sharing” is a stretch. Even if the risk sharing is between the membership of the scheme, for a single employer to move from the simplicity of paying a defined contribution to the complexity of paying scheme pensions is a big ask. I believe there will be one or two who may, voluntarily, as a statement of defiance , or for specific reasons – such as  existed at the Royal Mail. Upgrading a DC plan to a CDC plan is likely to be an exception – is is not likely to be the rule.

CDC schemes do not need employers – they need members (with pension pots).

There is, within the lengthy provisions of the Pension Schemes Bill, two sections that envisage CDC not as the vehicle for a single employer but as a means for employers to plug into a pooled arrangement, run as a master trust.

This is the lifeline that CDC may need if single employer schemes do not happen.

The single employer DC scheme is becoming an endangered species. When employers as big as Vodaphone and Tesco pack in their own trusts and plug into LifeSight and Legal & General’s master trust, then you have to ask whether even the single employer workplace pension is viable as an occupational pension scheme.

The inexorable decline of single employer occupational DC plans looks as inevitable as the demise of single employer DB plans – at least in the corporate sector.  To build legislation on a sinking raft risks that legislation being swamped by a sea of troubles, before it even makes it onto the statute book.

one trick poiny 3

Master trusts can pay CDC pensions as “standard”

CDCs best hope, other than for the exceptions such as Royal Mail, is as a means of multi-employer schemes providing scheme pensions to participants of DC arrangements. Effectively this is the means for master trusts to avoid the perilous business of investment pathways and offer a default decumulation strategy to their millions of members.

I understand that the Pension Policy Institute are envisaging looking at the mechanics of a “decumulation only” version of CDC whereby the “collective” element of the scheme would kick in only when a member chose to stop saving and start spending – their DC pot. This is a timely intervention into the debate and – if it is led by those mooted to be leading it, I have no doubt it will be a great piece of work.

We now know how to get people saving in retirement but since we kicked away the restrictions in 2015, we are giving people little help on how they spend their savings.

People continue to tell IGCs , trustees and anyone else asking the question that they are looking for a default was of turning their pension pot into a retirement plan and that the default is not an annuity.

CDC could be that “default decumulator” – it could be the standard way people get their pot paid back to them. A means of ensuring greater operational efficiency, longevity protection and trouble-free pensions for millions of ordinary pension savers.

CDC could manage the wage in retirement provided by NEST, NOW, Peoples Pension , Smart, L&G, Scottish Widows, Lifesight, the Aon and Mercer master trusts or any other of the authorised master trusts overseen by the Pensions Regulator.

The provision of these scheme pensions would be a matter for the commercial master trust to administer and ensure funding for. The employer would have no liability for outcomes, individual savers would choose between this default and going their own way.

This is a pragmatic and effective solution for millions of savers for whom the investment pathways look dangerously difficult. I will expand on the weaknesses of the investment pathway approach for the mass market in further blogs.

When employers part company with their DB schemes

There is an even more charged debate to be had about the fate of DB pensions post the  Covid 19 pandemic. Yesterday I wrote about complacency among some senior pension people who say that the pandemic is a distraction and that we will return to business as usual in due course.

This is to underestimate the damage it has done to the covenants of many employers which are now holed below the waterline. Many DB schemes will go into the PPF and with them will go many members who have no choice but to take a substantial drop in their pension expectation so as to qualify for a place in the lifeboat.

I do not think that people should have to take that haircut. Here is the opinion of one actuary on an alternative proposal

It is an abiding frustration that the moment a DB employer goes into insolvency, legislation mandates the smallest possible benefit outcome for members i.e. an insurance buy out, being the most expensive way of providing pensions, results in the smallest benefit outcome.

And the moment a scheme goes into PPF assessment, transfers out are banned. Why is that? Why not let members take a share of fund TV to CDC? Deferred members could do very well out of it. I don’t see why a ban is necessary to protect the PPF e.g. do the share of fund TV calculation on the PPF’s S179 basis.

Some high profile schemes where the employer has gone insolvent (British Steel, BHS) were well enough funded for a TV to a CDC scheme to provide a potentially attractive expected outcome.

The only point where members of funded DB plans get no choice is in the PPF assessment period.

Where the link between the employer and the trust is broken, as happens when DB schemes enter the PPF , shouldn’t it be possible for members to choose whether to lock down into a fully guaranteed PPF scheme pension or transfer to a CDC plan with no guarantees but significant upside? Is is fanciful to think the CDC scheme might be run by the PPF?

This is not a new idea, it has been floated on this blog many times in the past, but I think the current circumstances of pending legislation and an actual pandemic, makes this idea worthy of immediate consideration.

Coming out of your employer’s DB plan …”you’re better off together”.

Having been present when the members of British Steel’s DB plan had to choose between the PPF and a new DB plan, I know that many chose what they thought was a better way, preferring to have their transfer value invested in self invested personal pensions. How much better had it been , if they could have continued to participate in a collective plan, albeit independent of their employer (with whom many had lost confidence).

More generally, the resilience of CDC – relative to the SIPP approach will soon be modelled (let’s hope by the PPI as well as by the actuaries involved with the Royal Mail).

The actuarial  modelling  on the impact of the market movements  to the end of March on Royal Mail’s CDC predicted that next year’s increase would be 0.5% lower than otherwise. No cut in benefits was predicted.

Compare this with the sequencing risks faced by those in individual drawdown, where the market is typically off 20% and the fundamental case for collective provision will become clear.

Put simply – you’re better off together.

And finally – DB master trusts

The  positions many small employers in the Plumbing pension scheme find themselves in as a result of the closure of the scheme to future accrual was bad enough prior to the pandemic. What is happening to the scheme since the crash in asset values and the incapacity of many plumbers to earn much of a living, can only be making the situation worse.

Isn’t it time that we started looking at radical alternatives to the enforcement of section 75 debt in such situations. Would the replacement of guaranteed benefits for market based plumber’s pensions be a more sensible way forward than the drastic measures being taken by trustees against their participating employers?

Ros Altmann, who is at the centre of the work the Lords are doing on amending the Pension Schemes Bill, should consider whether the kind of emergency powers assumed by Government in many other parts of the economy, can be employed to relieve the pensions misery that section 75 could wreak to employers and members of DB master trusts.

Time for some fresh thinking on CDC

Until recently, CDC was seen as a DC upgrade, that was in the confident world of a bull market, full employment and a healthy nation.

Things are different now, Covid-19 is a great disruptor, things are not getting back to normal and we are unlikely to find the post-pandemic landscape so benign. DC plans will be particularly vulnerable as they offer members no protection against market falls. Many DB plans look vulnerable both in terms of increased deficits and weakened covenants. The PPF has already cast doubt over its goal of sufficiency by 2030.

In this new environment, the need for a more flexible way of paying scheme pensions, which is based on defined contributions and pays market related pensions is what is needed.

But for the fresh thinking outlined in this article to see more general acceptance than the small number of readers of this blog will mean four things happening

  1. An acceptance that we cannot afford many or the guarantees in future promises
  2. That CDC cannot just be DC+  but can be a lifeboat for DB
  3. That “DB minus” is a reality (the haircut of the PPF)
  4. That CDC could trump DB minus  for many members in PPF assessment
  5. That CDC trumps personal bankruptcy – (for those hit by section 75 claims from DB mastertrusts)

We are – in this period of transition when we are stuck at home, able to think the unthinkable. I hope that the PPI will look at some of the ideas in this blog and test them.

Without an injection of fresh-thinking , I fear CDC risks becoming a one trick pony.


one trick pony 2

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, age wage, CDC, pensions and tagged , , , , , , , . Bookmark the permalink.

4 Responses to Time for some fresh thinking on CDC

  1. Kevin Wesbroom says:

    You had me worried for a moment there Henry with your title. I felt you had become an inconstant or inconsistent (or do I mean incontinent?) Friend of CDC. CDC has always been more than a whole of life solution. That’s why the legislation has the specific extended powers you cite. CDC decumulation solutions are the real long term future for CDC because they fill the market failure since Freedom and Choice came along. Which is that we need a default ending to tag onto default saving for the mass market. BTW we must get away from having CDC and Decumulation – such an ugly word – in the same bracket: how about Target Spending plans?
    We do have to recognise that these pose very different regulatory challenges, once they are being “sold” by different master trusts. How does mastertrust A offer a higher pensions than mastertrust B for the same initial capital sum – has it got a better investment policy, lower expenses, or just a more optimistic actuary? DWP will need to strike a tricky balance between protecting members’ interests and not over-constraining the underlying CDC funds.
    The PPI work that you quote – disclosure I am a PPI Council member – will be a key step in terms of moving the debate forward here. It will look at the mechanics and viability of Target Spending plans in terms of the member outcomes, minimum funds sizes and other features. It can help shape the debate and regulatory framework about this key development of CDC . They have never been a one trick pony – and spending solution is the next big push to show that the pony can not just tap its foot, but can actually count.

  2. henry tapper says:

    Nothing like a little bit of disruption on a Sunday morning Kevin. This blog has a long history of thinking about CDC as an alternative to investment pathways for the ordinary saver who wants a non-advised solution. I think CDC a general tonic for those troubled by their pension being governed by annuity rates on the one hand and by volatile markets on the other. Target spending plans make for better reading than decumulation strategies, perhaps a wage for life , wage in retirement or even an AgeWage make more sense still to non specialists in the dark arts of pensions – I still like your target logo and will dig it out

  3. Eugen N says:

    Without trying to rain on your parade, I do not think that collectivisation responds very well to the public behaviour around pensions. People still want ‘flexibility’, whatever that means for them! It has become even more clear now, when some DB trustees stopped offering CETVs based on the tPR guidance. Getting calls every day, about why x trustees delays issuing CETVs.

    I do understand the benefits of CDC, however I think it would be an uphill battle to sell it to people who can understand private ownership, they are not keen on collectivisation. But we will discuss this again, when the Bill is enacted as Statute!

  4. henry tapper says:

    Eugen – I think people will decide on practical rather than ideological grounds – but take your point. Choice is important in a free society.

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