Simon Eagle is not your common or garden pension salesman. He is a mild-mannered actuary with a mischievous smile and a stammer that he has bravely overcome.
When he claims that CDC beats drawdown by 57%, we should listen up.
I am 59 and using (the largely discredited) 4% rule, I could draw down at 65 £25,000 pa or Simon’s 3.5% (safe rate) £17,500. My ears prick up at the thought of a whole of retirement pay rise from £17,500 to £27,500 pa.
Is Simon Eagle a pension scammer?
If your common or garden pension salesman offered me a 57% whole of retirement pay rise , just for switching to his pension plan, you would give him the bum’s rush. I know a few tweeps (and the bearded wonder) who would need no second invitation.
But here are the five reasons why I am looking to CDC to provide me with a pension.
- I need more from my pension pot than I can get from an annuity or a safe rate of drawdown
- I want a wage that lasts as long as I do and has built in inflation protection
- I’m prepared to take my chances that pension increases don’t come through and am not afraid to take the odd pay-cut.
- I do not want to be worrying about pension decision making – especially as I get into the later stages of retirement
- I understand and accept the basis of Simon’s bold claim. Unlike DB pensions and annuities, CDC pensions don’t have to be subject to locked down investment strategies and unlike drawdown pensions, they aren’t subject to the ruinously expensive advisory costs and wealth management fees that make drawdown so risky for all but the experts,
Salesman Simon Eagle is no scammer – he’s just a very bright man who has integrity in spades. Thank goodness we have actuaries like him who have the courage of their conviction.
Putting our money where your mouth is….
There is a sixth reason which I will admit to. By wanting it, I hope I can influence some of the people who are in a position to me getting it. Among them I include Simon, who works for a consultancy that provides Britain with one of its most successful master trusts – Lifesight. Willis Towers Watson could soon be one company with Aon. Aon offer the Aon Master Trust, which like Lifesight , has over £2.5bn in assets and carries the retirement hopes of hundreds of thousands of savers.
I am waiting for both WTW and Aon to announce firstly that they will be opening a CDC section of their master trust as soon as regulations allow. Simon told the Corporate Adviser master trust conference that he expected to see the regulations for master trusts in place by 2022. In a conversation with TPR’s David Fairs yesterday, I gathered that CDC secondary regulations are “in plan” for the spring of 2021. On a Friends of CDC call on Thursday I asked salesman Simon and Aon’s CDC-guru Chintan Ghandi if they were thinking about CDC pilots. Right now the answer is “no”, but that won’t stop me asking (again and again and again).
The second question I’ll have for them – once they’ve got the CDC pilot agreed, is how I can transfer the AgeWage workplace pension from its current provider – to the new CDC offered by WTW-Aon.
And in case anyone from Aon or WTW are worried about over-promising, I will emphasize that nothing – nothing – has been promise by salesman Simon or guru Chintan to me or any other friend of CDC – yet!
At same return and charges it could give 10% to 20% more, because all people with health issues will transfer out and not take a CDC pension. For some even a enhanced pension annuity would be higher than a CDC pension. The only advantage comparing with a similar DC FAD scheme is the mortality gain from people dying early, however I expect many CDCs will offer a 20 years guarantee as well to alleviate the risk of dying very early.
We need to be clear, at same return and charges, with all people retiring healthy at 65, you cannot go over 3.5% SWR in a CDC scheme. In fact, I expect there would be regulations and tPR will keep a close eye on asset allocations and the level of pension payments. We could end up with 30% growth assets 70% liability matching due to regulatory pressure, instead of 65% growth assets and 35% liability matching assets. Starting withdrawals at 5.5% would be foolish, actually disastruous. I could say it is a scam!
This would be good for you and many others Henry. I know one has to make changes incrementally but here is another possible improvement. I don’t know the mathematics of this suggestion but…. I would like CDC pension schemes to offer different rates of CDC pension depending on whether the member wants a “single life” CDC pension or a “joint life” CDC pension. To use your examples, many people would prefer to use their 57% higher pension possibility to fund better death benefit options for their life partner. Or maybe a 3rd option to instead use the additional returns to provide a lump sum death benefit for families or children. If we are going to make use of CDC s greater flexibility then we need to recognise the TRUE reason many people opt for drawdown, which is death benefits.
Brian, I think that CDC pensions will have a 50% spouse pension built in. For single people, I do not know if they can receive an enhancement. I do think that a 20 years guarantee could be also built in.
Hi Eugen. Yes, I have spoken with an actuary involved with modelling CDC who confirms they have used a traditional 50 per cent spouses benefit. That’s my point! Why not consider better death benefits for those with spouses and indeed the option for choosing lump sum death benefits rather than just guaranteed period death benefits for those without spouses?
CDC can offer any of the benefits arrangements we have seen in traditional DB. This could include a death benefit. However, there may be tax issues to surmount. The only thing which is novel about CDC is the risk-sharing among members.
Members in poor health may choose to transfer out but that would involve forgoing all other benefits – most notably spouse’s rights. I would point out that most DB schemes do not permit transfers for pensioners in payment.
I would be amazed if TPR had any say at all over asset allocations – the liability which would come with that is completely anathema to HMT.
ConKeating, I was just thinking about transferring before starting benefits, like all DB schemes allow. I think that transfers should not be allowed from CDC, but I am not srafting the law!
Thanks Con. Given that normal DC offers lump sum death benefits which are tax free up to age 75,is this not possible with CDC?
There is absolutely nothing wrong with transfers – they can no more harm a CDC scheme than a transfer under individual DC.
To have greater validity the comparisons should separate longevity pooling dividend, charges dividend, Utility value of inflation protection, Utility value of certainty ( or SII SCR/RM/Buffer) , asset allocation elements. For me the LPI element of annuities is circa 40% in ecomomic value but has much lower utility value