Why CDC pensions must break the link with the employer.

My virtual conversation

I wrote a blog yesterday and sent its questions to those participating in the debate that happened in parliament between 4 and 6pm. I am grateful to Stephen Timms for acknowledging the mail.

Yesterday’s session of the Work and Pensions Select Committee was held without the public ( I was turned back at the Cromwell gate) and with one of the witnesses appearing remotely. For all the hand-waving about “back to normal” parliament is still operating remotely for the most part. I cycled home and watched the event on parliament TV.

It’s life – not pensions – that’s unfair

I’d anticipated that this  discussion of CDC,  would look progressively at how CDC fitted into current choice architecture and focus on CDC as a means of “accessing pension savings”

But the two hour session turned out to be another turgid argument wrestling with fundamental issues of insurance , sponsorship and capacity for risk. As a saver, I was left none the wiser as to how I might use CDC to access my pension savings.

Bizarrely, Ros Altmann chose to hi-jack the occasion to propose that before joining a CDC scheme, members should be health screened to ensure that the sick were not subsidizing the healthy.

At some point , we have to accept that life is very unfair and we do not have an allotted lifespan, pensions are an insurance against living too long not a trading platform for longevity.

We heard a further long discussion on the role of the unions in creating industry wide schemes with the suggestion we might have a CDC scheme for care workers. This is the stuff that sunk stakeholder, we have a perfectly good industry wide savings network where Nest now has over 1m employers participating in a master trust. There is not a problem accumulating savings, the problem is in spending them.

Equally bizarrely, Ros Altmann’s solution to the spending problem was to encourage people not to spend their pot but to hoard it as an insurance against the costs of later life care. It is not surprising that CDC was canned when she was Pension Minister.

Accessing your savings using CDC?

My problem with the session was that it did not engage with the exam questions of the WPSC’s inquiry

Ros Altmann felt that these “decisions” could be taken after a telephone call with Pension Wise.   She endorsed the cherished view of the insurers that we should be required to go through the Pension Wise process. But will Pension Wise be able to inform people of their option to access their savings through a CDC scheme? Is a 45 minute telephone call going to help people choose this from other investment pathways?

There was no discussion about how people could access CDC to spend their pension. This was about as much as we got about the big questions of “advice , guidance and informed choice”.

David Pitt-Watson spoke loftily of the advantages of a CDC pension as the solution to the woes of the ailing defined benefit sector while Simon Eagle talked of the actuarial simulations that showed that people investing over the last 100 years had little to fear from market crashes.

But no one spoke to the practical issues people have turning a pile of pots into a wage for life.

Instead, much of the two hours was spent discussing whether on not the Dutch experience of CDC was relevant to the UK and how the Royal Mail CDC scheme would deliver inter-generational fairness.

All this would have been interesting had we not heard it before and had it had anything to do with informed choice.

Even Angela Gough, the one new face on the scene,  could bring us no news but that the start date of Royal Mail’s corporate pension plan had been put back to 2022. We were told the new scheme had still to take a decision on whether it could take in transfers of DC pots owned by postal workers.

So 135,000 postal workers are still waiting for their member choices.

The choice to use CDC will generally rest with the saver not the employer.

Stephen Timms had kicked off the session with two questions. The first was whether we had anything to learn from abroad, which led to a tedious reiteration of how the Dutch had got in a mess and long homilies on the importance of communication (pt 94).

The second question was more interesting, “could people chose to be in a CDC scheme?“. This question was not properly addressed so I will look at what the reality of “choosing CDC” is today.

Right now, unless you are a postal worker, you have no prospect of being in a CDC scheme. If you are a postal worker, it is a CDC scheme or no employer sponsorship of your retirement income. It’s a binary situation where there are no choices.

For all the talk of communicating the risks of CDC, the bigger risk is that there will be no CDC to help people access their pension savings.

The Pitt-Watson/Eagle/Gough position is so tied up in the idea of “occupational pensions, that the concept of a free-standing CDC pension sponsored by the transfer-in of DC pots simply isn’t being entertained. But that is precisely what is needed and is where CDC can and ought to develop.

Royal Mail and a handful of other open occupational pensions (RM is still accruing guarantees for some members) could use CDC as a means of managing members away from reliance on the employer to guarantee their pension. There is a limited market for employer sponsored CDC plans both for saving and spending. This is such a niche market that it does not merit much attention in this blog or indeed at yesterday’s meeting,

But every other DB sponsor is doing all they can to put distance between themselves and the payment of pensions. Employers do not want mortality risk on their balance sheet, they do not want actuarially calculated cash demands from their trustees based on assumptions they have no control of. They want to outsource the liabilities to insurers and super trusts and master trusts that prepare them for buy-out.

So why would any employer , ridding its balance sheet of unwanted pension risk,  want to voluntarily enter into a sponsored CDC arrangement where they become associated with the payment of pensions (guaranteed or not)? All parties seemed to see master trusts as a way of satisfying pent up demand from small employers to run CDC pension schemes of their own – please show me where this demand is! I see precisely the opposite, I see employers (small and large) looking to rid themselves of anything to do with paying staff pensions.

Even in a master trust, an employer has obligations (either to meet the DB obligation or the DC bill). CDC schemes may be organized within a master trust, but they need to be ring-fenced   to protect employers from any liability to the funding of the scheme pension.

The choice of how people spend their pension pots is ultimately the saver’s choice. So Stephen Timms’ question is the right one. People with DC pots need to choose for their money to go into a CDC scheme and for that to happen , they need assurance that the CDC pension as a safe haven. CDC needs an assurance framework, much as master trusts do.  People need to have the endorsement  from the Pension Regulator and wider Government that they are entering into a well-regulated pension scheme. CDC needs to take a step forward with confidence and become a means of turning pots to pensions.

If CDC schemes are to prosper they must be allowed to be self-sufficient entities, operating independently of any employer for the benefit of those who choose to see their pots managed that way. CDC must become part of the choice architecture we currently call “investment pathways”.

Default or not default – that’s the next question.

The next question is whether a CDC pension can become the default spending option for those who have been saving in a DC scheme (most potently a DC master trust). The prospect of this was raised at the meeting and was met with horror by Ros Altmann. Since Royal Mail has not even decided whether to allow transfers in of external DC pots we must assume Angela Gough is “undecided” , Simon Eagle and David Pitt-Watson were non-committal.  But the answer to this question has to be “yes“.

It has to be “yes” for commercial reasons, no-one is going to offer a CDC scheme that relies upon scale, without a business plan that shows that scale can be achieved. We know that defaults are followed because (unlike Pension Wise) they lead people down a pathway that requires no resistance. The percentage of savers who don’t default is roughly the same percentage as use Pension Wise. This is not coincidental, most people do not make or want to make informed choices on pensions, they expect other to do that for them,

It has to be “yes” for the sake of savers. People want the provision of a definitive course of action which is why they are happy to follow default contribution scales, default investment strategies and why they would be happy to follow a default spending strategy if anyone had the kahunas to offer one.

Of course people want the freedom to do what they like , but as the CWU’s Terry Pullinger puts it, “people also want the freedom not to bother with freedoms”.

Addressing the issues of those trying to retire from work

Stephen Timms asked the right question, the decision to be in a CDC pension should be a decision taken by the 700,000 UK workers who start taking decisions each year on how to spend their pension pots.  These decisions have nothing to do with employers and everything to do with what those 700,000 want from their pots. All the surveys show that what most people want from their workplace pension pot is a pension – a wage paid to them for as long as they are around, and possibly longer if their partner survives them.

A pension is what people are promised when they join a workplace pension, a pension is what employers say they offering their staff and a pension is the default that should be the conclusion to occupational pension savings. GPPs should be able to offer access to a CDC pension as an investment pathway.

And the sooner we make CDC a generally available investment pathway the better. The annuity has been proven to be the wrong way to provide this , it was rejected in the 2014 budget and shows no sign of returning to public favor. The guaranteed pension offered by employer sponsored DB plans survives only where there is a super-sponsor (e.g. Government). CDC is the only innovation that has emerged from the post freedoms wasteland. It is the answer for most people, drawdown , annuities , care-funding and inheritance planning are minority options that should will tend to be advised. CDC is the non-advised pension of the future.

I wished, back at home watching the event on parliament TV, we had somebody saying these things in the palace Westminster.

It is time that we had the courage of our conviction and adopted CDC as a default decumulator for schemes such as NEST, People’s , Lifesight and the larger insured master trusts, other smaller master trusts such as Smart and NOW should also be considering a ring -fenced CDC scheme to provide scheme pensions as a default for those saving with them. They should be telling Guy Opperman this is what they want as he visits them this winter.

In the meantime , we need some fresh-thinking in this debate which is going very stale. The meeting yesterday was another opportunity lost.

Post script – The questions that didn’t get answered

For those who missed yesterday’s blog – these are the ten questions I wanted answering.

  1. If one of the risks of CDC is the failure of a sponsor’s covenant, can we imagine a CDC scheme that is independent of a sponsor and funded purely from the transfer of existing DC pots? If so, how might this work?
  2. Were a CDC scheme to operate independently of an employer sponsor, how would it be positioned against the FCA’s investment pathways; might it be a 5th investment pathway?
  3. Would members be able to transfer their DC savings pots into a CDC scheme without needing to take advice, or would it be better to require advisory clearance as happens with DB transfers?
  4. What would the impact be on other retirement products such as annuities and SIPPs, if CDC competed for DC saver’s pots?
  5. What are the risks that would be reduced by offering CDC as a way to spend retirement pots?
  6. Is there a commercial reason for operating a CDC scheme independently of a sponsor?
  7. Would a CDC scheme be considered to be a workplace pension if it operated without a sponsor? If not, would it be subject to the charge cap?
  8. Could a CDC scheme operate on the basis outlined above but sit within a master trust , using the DC savings scheme as a feeder and effectively becoming the master trust’s default spending option?
  9. Could a CDC scheme in payment offer a transfer value to purchase an annuity or to a SIPP?
  10. Could such a scheme operate within the occupational pensions framework or would it be considered a “non-workplace” pension scheme?  Can we properly describe a non-guaranteed non-sponsored pension scheme such as CDC – a pension or is it a collective with-profits annuity?

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Why CDC pensions must break the link with the employer.

  1. Brian G says:

    Hi Henry, I think your 10 questions are all pertinent, particularly Question 9. I think if a non-employer sponsored national CDC scheme were available, then the issue would be how people would ever choose it? Given that people do not like making choices (agree with you wholeheartedly there), why would they CHOOSE to move to CDC, and if they were employed, what would prompt their employers to go down that route for their staff? And if it became a default, is it really so much better than the other choices that it merits being a default? And if it is not a default then who would choose it? Difficult one.

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