— Stuart Breyer (@stubreyer) November 4, 2020
The question is the right one. You can’t go on Mallowstreet unless you are a member, which means the wider discussion needs to carry on elsewhere – why not here?
My response to the debate that was reported in Sandra Wolf’s article can be read here.
In private I posted on Mallowstreet
Without Royal Mail, CDC would have continued to be a good idea, beloved of academics but forever sat on the shelf. Led by Jon Millidge and Terry Pullinger, the RM CDC plan could open the doors for a new wave of pensions paid from people’s savings. The task now is to extend the work of these pioneers so that smaller companies can participate in multi-employer master trusts. I hope that eventually people will be able to transfer in their DC pots into master trust schemes and convert pots to pensions. That makes a lot more sense as a default retirement pathway than any other solution promoted so far.
But that doesn’t really answer the question “will CDC be a success story”. The answer to that question will be known in one or two generation’s time. If we are to believe the modelling conducted by consultancies, CDC would have been a success if implemented at any time over the past 100 years, but the past- famously – is no certain guide for the future. There is no absolute predictor of the success of a pension system, other than its continued support by the people for whom it is meant.
The State Pension is a success story?
The State Pension is (in its post Beveridge incarnation) 72 years old, there are very few people in Britain who were working before 1948 but even they got something from the 1909 scheme. Though the state pension has been reformed, most notably in 2015, it is without doubt a success story.
The guaranteed defined benefit system, good in parts
The defined benefit pension system that took hold post war and flourished in the final quarter of the 20th century is not faring so well. It over-extended itself and became a gold-plated benefit for those lucky to be in one. Meanwhile, those not accruing DB, got -at best – a contribution to purchasing their own pension from their employer, at worst, they were left to get on with things on their own. In 2014, Government abolished the need to purchase a pension and a great proportion of the population will be relying on retirement savings rather than retirement income, to supplement what they get from the state. The defined benefit system has worked well for a few, but failed to become a universal second pension.
We are shoring up what’s left of DB, hoping to keep some parts open for the future while hoping that those parts in run-off , do not damage their sponsors as they move to self-sufficiency and wind up.
Workplace DC pensions and private DC – a work in progress
There’s a whole lot of saving going on but what we are building reminds me of newly built houses you see abroad. The ground floor is complete but the upstairs is no more than an empty frame. DC is half-built – an admirable savings system with ample tax-incentives, but lacking the in-built facility to turn savings to income.
We cannot really call DC plans , pension plans. For the mass affluent, for whom retirement saving is now the accumulation of a capital reservoir, that may not be a problem.
Flexible drawdown plans meet the needs of those who have property and private wealth and don’t have debt to service, rent to pay and little help or experience in long-term cash-flow management.
CDC – bridging the gap
It is this sizeable proportion of people over 50, for whom CDC can be helpful. For those in DB there is a safety-net if the scheme sponsor fails and – though the cost of that safety net is high, it is being met by remaining sponsors. The PPF has developed for DB out of popular demand, out of revulsion for the fate of the workers in schemes such as ASW and because of campaigning from Ros Altmann and others.
CDC will be a success if it does a similar job and protects those with DC pots from the calamities that can befall them. There are many routes to failure but we know what failure looks like- it’s that point when the pension pot runs out before you do.
CDC is designed to make sure that does not happen. For it to be a success it needs to keep going , as the state pension has kept going. It needs to avoid over-extending its promises as guaranteed DB schemes have and it must become the completion of the DC building, providing a wage for life for those with DC pots.
Distribution is key
CDC needs to be built then sold. This is a tough ask but it has been achieved before – and recently. Until ten years ago, the idea of a multi-employer workplace pension was virtually unheard of. The arrival of Nest and other master-trusts has prompted the creation of multi-employer schemes which are cannibalizing smaller DC schemes and creating a new market.
It is almost as rare for a new single employer workplace pension to be set up, as it is a new DB plan. The power of distribution of CDC is moving from single employers (unless they are as big as Royal Mail) to multi-employer master trusts.
Coincidentally, some of the largest of these trusts are run by some of the consultancies promoting CDC – in particular Aon and Willis Towers Watson. These large schemes have the capacity not just to accept disparate employers, but also non-connected employees.
As employers walk away from the provision of pensions, those providers of DC workplace pensions, now have the opportunity to build the roof for their house.