“The CDC alternative must now be introduced, because the status quo is so unsatisfactory.”

Martin Wolf , writing in the FT

In another important article , published today, Martin Wolf points out what we close to pensions cannot see, that our DC pensions are failing us.

Martin Wolf

His estimate that for a lifetime of saving at median rates, our DC pensions won’t provide us with a third of our pre-retirement income is probably optimistic. Taking into account career breaks (enforced and voluntary) , few of us will get a full contribution history.

So the amount we have in our pension pot will simply be inadequate and we will be forced to take a lower income in retirement, work longer or risk our money running out before we do.

These harsh realities are made worse if the only choices available to us are to purchase an annuity or DIY drawdown  (most people will not get the services of an adviser at an affordable price).

So Martin Wolf is right, we have to have a better way of paying our money back to us than the status quo is offering.

We need above all, to stay invested in later years so that our money works as hard as we did. That is not a glib statement, but an economic fact. We cannot have our savings de-risked as is happening at the moment so that when we get to later life we have massively reduced opportunity for growth on our money.

By joining a collective fund, we can stay in the game because our financial experience is fungible with those coming after us, indeed those coming after us will share the risk with generations coming after them, many in those generations are yet to be born.

Whether DB or CDC, so long as people keep on saving into schemes and drawing pensions from them, the sweet spot is maintained, our money remains invested in real assets which can do good for the planet, society and for the governance of the land.

This point is well made by Martin Wolf. But there is more to staying in a collective pool in later life than investment returns. There is also the question of social insurance. It is inevitable in a CDC pension system that there will be people dying sooner and people dying later and the former insure the latter, meaning that everyone, while they are alive, should get bigger pensions than if everyone is on their own (in an annuity or DIY drawdown).

The big wins from CDC come from avoiding the twin pitfalls of self-insurance of how long we’re going to live (we cannot ever hope to get that right) and the de-risking of our investments which leads to poor pensions or the risk of our money running out.

I’m  not tired of saying this.

You may not be reading me saying these things for the first time. Indeed you may not be reading Martin Wolf saying these things for the first time. But these things need to be said because they are not being said inside of pensions – enough.

Inside pensions people still worry that from time to time an equity based, community insured CDC scheme may have to reduce in-house pensions. This is not a worry, it is the essential safety valve, like a weir on a river, it allows for the smooth passage of money over time. Without this valve , we end up with the problems that beset DB which has spiralled into a death vortex of low-risk investments and constant cash calls on sponsors and members for more money.

People inside pensions seem oblivious to these cash calls being the unfairest intergenerational transfers, where those in work see wages and pension contributions depressed to maintain the lifestyle of those who have retired.

People inside pensions also seem oblivious to the reality of today, where people are being forced into drawdowns of 8% or more because they need replacement income today. Of course these rates cannot be sustained and many DC pots are little more than providing bridging till the state pension cuts in.

Martin Wolf’s point is not that CDC is satisfactory, it will of course come in for criticism when people die early or pension increases have to be reduced or even reversed. Martin Wolf’s point is that relative to the status quo, CDC is tons better.

The real heroes of CDC aren’t pension practitioners but thinkers, policy makers and writers who are able to articulate the need for disruption of the status quo from the outside. There are a few brave souls within the system who call for change, the likes of Benstead, Arends, Salt and Eagle, but for the most part we have to look to  beyond our gates for perspective on our pension’s problems.

Simon

Matthew

Hilary Salt

Derek