I started writing about the need for a new kind of pension soon after the financial crash in 2008. With Quantitative Easing driving down interest rates, down came annuity rates too. Although annuities were improving in value with the adoption of medical underwriting, they were no longer a mass market product, acceptable to the body of retirement savers who were reaching their sixties. The 2015 reforms effectively released pension pots as capital which suited the financial planning industry but did not help people who wanted a wage in retirement. Although CDC as a concept was introduced more or less at the same time, it was not thought through by Steve Webb and had to await a second coming in the 2021 Pension Schemes Act.
Yesterday saw what the Pensions Minister calls a “job half done”, the introduction of legislation that allows sole employers (and groups of connected employers) to operate a CDC scheme. The other half of the job is to allow employers to outsource their retirees to disconnected master trusts capable of paying “in-house pensions” to anyone with a pot to transfer.
The pension industry continues to consider CDC a “re-risking” for employers and – for those who want to take on the payment of scheme pensions, it is.
But for most employers , CDC offers a default option for employees who do not want to choose their own investment pathway and who do want a pension from their pension pot.
What future for pathways and advice?
For the mass market , neither financial advice nor the newly created investment pathways appear to be the answer. The financial advisory market represents 10-15% of those in retirement with the platforms of SJP, Hargreaves Lansdowne and AJ Bell dominating the solutions for those who have the will and money to be advised or the financial self-confidence to invest for themselves.
There is much to be said for managing your own SIPP account or employing an adviser to do so and I look forward to getting a refresher on this from Dunstan Thomas on Thursday. You may want to use your lunch break this way too!
But this is a session for people who already know about retirement pathways, it will be full of people like me, the known knowns.
Reaching out to the unknown unknowns
The master trusts, especially those that took on savers new to the game through auto-enrolment, are full of members who we know nothing about and who know nothing about pensions, except that pensions provide an income in retirement.
They are ironically the people who are financially excluded from pensions, typically being outside the defined benefit pension system and reliant on savings, houses , the state pension and benefits for their retirement.
Putting aside the difficulties for those on low income – with means tested pension and universal credits (pace Gareth Morgan), these are people for whom CDC in-house pensions are designed for. Even if they do no more than provide a top-up to state benefits, the CDC pension is likely to be a lasting solution to the problem of turning a pot into a wage for life.
If pensions has a social responsibility, it is here. Whether the pot is £10,000 or £1,000,000, a CDC pension is a responsible alternative to an investment pathway and we ought to be thinking of them as the future of retirement income.
The culmination of a two decades work
By the time CDC pensions come on stream , we will be nearly 20 years on from the point at which auto-enrolment was conceived and well over 10 years from the inception of employers staging. We will have seen 8 or 9 years of pension freedoms and we will be beginning to see the emergence of pension dashboards. The investment pathways will be bedded in and we will be seeing schemes and pots consolidating at pace.
We will be looking at a mixed benefit pension system with a combination of DB pensions and DC pots supporting a stronger state pension. Hatton should be proud, the pension system has progressed well.
The creation of a CDC framework into which we can pour our pension pots in return for tax free cash and a wage in retirement is something I look forward to.
It is not generally recognized as part of our future furniture , but I am convinced that it will happen and that it will happen primarily because there is commercial reason for master trusts to make it happen.
For a second time in two decades (the other being auto-enrolment), policy and commercial interests are aligned. CDC will be our second pensions revolution.