Why CDC could and should change pensions for good!


CDC targets a pension – it doesn not guarantee it. It operates on a “best estimate” basis in funding benefits.


Yesterday I wrote about the changing mood music at the Pensions Regulator – resulting in delays to the publication of its draconian funding code. The changes result from improvements in DB scheme funding and a new optamism about investment , created by a Government looking to re-risk pensions with productive capital.

In this blog I want to think about two big drivers for the future

  1. The PPF which in my opinion should be put in charge of the regulation of Britain’s closed DB schemes
  2. CDC, which shows a way forward, not just for the DC schemes which are failing to provide pensions , but for open DB schemes which could adopt CDC’s “best estimate” approach to funding.

The Pension Regulator now talks of it being the Regulator for “pension savings”. There is not much pension saving going on in pension schemes which are closed for future accrual, they are philosophically and practically aligned to the PPF – which is why PPF should be made a regulator in its own right – a regulator of closed schemes with a clear remit to focus on funding – avoiding too much prudence.

This would free TPR to focus on what it says it should  be focussing on – saving for retirement and spending those savings as pensions.

Yesterday  saw the annoucement of the start date for CDC schemes

From the way the Pensions Minister is promoting them (a hybrid alternative to defined benefit and defined contribution schemes), we should take heart.

Untill now , the way that open schemes like the USS have reduced risk to sposnoring employers has been to put up the cost of membership to members , reduce benefits and move to a more defensive investment position.

Maybe the CDC approach would be more helpful, initially going forward, but eventually as a way of getting all benefits paid in full. By adopting the CDC best estimates approach to paying benefits, USS and other open DB pensions could maintain the sweetspot of funding indicated in this graph.

And if this approach works for paying pensions from DB schemes, then it certainly works for paying pensions from DC schemes, something that isn’t happening right now.

Many years ago, I started arguing that strong DB schemes might want to take DC pots into their asset base in exchange for a CDC pension.  I wrote a blog in May 2011, it was entitled “CDC could happen if we put our mind to it” and contained these paragraphs

IF- we put our minds to it we could organise NEST‘s TDF funds to provide collective DC, we could organised the PPF to provide collective DC , we could even get the bigger solvent occupational pensions to buy back some of their DC funds and pay them as scheme pensions.

How are we going to organise ourselves? This will not happen conventionally, it is going to happen because a bunch of guys and girls say, enough is enough, we can’t go on pouring good DC money down the drain on a hopelessly outdated, inefficient unworkable system of annuitisation.

Times have moved on , but I still think there is scope for strong DB schemes to pay CDC pensions and for NEST and other master trusts to pay CDC pensions as well as or maybe instead of offering conventional pathways.

Once you except that “best estimates” are a legitmate way of funding and paying pensions, then pensions stop being seen as liabilities prohibiting growth and return to the sunny uplands where…

  1. They are a source of productive capital for GDP and for social and ecological good
  2. They are a source of retirement income for all who save for retirement
  3. They restore confidence in a pension system riven by the disastrous canker of the mark to market school of pension accounting

CDC may not be the solution to everything in pensions, but its “best estimate” optimism is the antidote to the lock-down blues in which pension funding has been sitting, for the first 20 years of this millenium






About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Why CDC could and should change pensions for good!

  1. John Mather says:

    How is this different to a with profits mutual that writes it’s own with-profit annuity?

    Back in the day Proprietary companies were said to be for the benefit if shareholders ( now add senior management) and Mutuals for the benefit of the staff ( they need to be sold to private equity to really benefit senior management )

  2. henry tapper says:

    This is quite a way from with-profits John. Firstly, it is not insurance and therefore should not be reserved against as an occupational scheme, secondly there is no guarantee if you are a member. the corolllary question is “what security is there behind the promise other than the money of others in the fund, that is the exam question,

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