When you bring a new product to market, you first test whether there is a gap into which it can fit. If nothing else, the FCA’s Retirement Income Study is showing that there is space in the market for an “at retirement” product that provides a regular income which pays more than an annuity.

The Pensions Minister has made it clear that the current consultations on CDC regulations and a CDC code are only the first step

The aim is to make CDC available to anyone who wants a pension rather than a pot. This sound to me a much more ambitious project – one to rival auto-enrolment in its ambition.

When you launch an innovative product on the mass market , it is a good idea to trial it – and create a “proof of concept” that if not the finished article, at least tells you if you are going in the right direction. That to me is what a consultation on CDC should be about.

CDC is such an innovative product. And applications to apply for a licence to set one up will not just cost £77,000 per scheme , but £77,000 per section of a scheme. So if you’d like to set up a CDC scheme up with different rates of increase in retirement, or if you’d like to offer different ways of taking your tax-free cash, each option will cost you £77,000.  That’s a lot of money to spend on an application for something which has an as yet incomplete set of rules.

If I was paying that kind of money, just to apply, I would want to be pretty sure it was meeting the needs of the people I was applying to set a scheme up for! The DWP may have got it into their head that Royal Mail’s Corporate Pension Plan (CDC plan) is the POC.  If so – what is the member experience of using the scheme likely to be?

Over the weekend, I was trying to figure out how I – someone who at 60 would like to swap my retirement pot for a CDC pension – could do this. So I imagined a scenario where I became a postman and joined the Royal Mail CDC in 2022.

If I signed up and started building up some CDC pension , what would happen to all my money I’d been saving in my DC pots? Would I be able to transfer in my pension pots? What would I be offered by way of a CDC pension, would I be able to take my tax-free cash from the scheme as I went along, or would I have to take it all up front?

I know that not many postal workers are going to be reading either the DWP’s consultation on CDC or RPR’s consultation on its code on practice, but if one did (that one being the theoretical me) would I find my questions addressed.

The DWP and TPR would say that I was asking the wrong questions. Such questions are not for this consultation – but where is the sandbox where master trusts can test CDC out as a POC?   Where is the consultation with the general public?

Should the General Public have an expectation for CDC?

Is this what the public should expect from CDC?

The conversation about CDC has so far been conducted within a fairly tight bubble. With the exception of this headline in the Daily Express (March 18th 2009), I have seen virtually no coverage of CDC in any media.

The ultra-cautious approach to promoting CDC by the Government suggests that the DWP are anything but convinced that it really will be a “Pensions Boost for Millions”.

My attempts to engage with the CDC consultations have led to frustration, not just because I’m not an actuary or a lawyer, but because I’m asking the wrong questions. Instead of looking for reasons for CDC to succeed, maybe I should be looking at risk for it failing.

Reading David Fairs’ introduction to TPR’s consultation, I get the feeling that the Regulator sees CDC as an accident waiting to happen,

The draft code focuses on requirements that employers and trustees considering establishing a CDC scheme need to plan for now. We will be revisiting the code to expand on our expectations for the closure or wind up of a scheme in due course

We seem obsessed about CDC schemes closing, but have yet to see one open!  Can’t TPR focus on how a CDC scheme might help members rather than “expanding on expectations for the closure or wind up of a scheme?”

Nowhere are these  consultations more compelling than in their focus on member communication. This is from TPR’s consultation and it’s exactly right.

• Members are actively encouraged to give feedback on communications and raise concerns.
• There are clear and simple channels for members to give feedback.
• As part of the process of developing and routinely maintaining communications, views must be sought from a range of members who are representative of the membership as a whole.
• This process needs to establish whether members understand the communication, including the description of any impact on their benefits and the level of risk involved.
• There is evidence of the methods used to gather member feedback and its outcomes. This could include surveys to establish members’ understanding of the risks and benefits.
• Where ad hoc feedback is received from members it must be considered and, where appropriate, acted on. 

But reading the DWP’s response to its consultation on CDC , we find in paragraphs 62-63 which deal with communications that the concern is in how to tell people that a scheme is failing! There is a worry that complex actuarial testing won’t translate into easy to digest information on which members can take action.

Communication is rightly considered a two-way process but it is a process that neither the DWP or TPR has ever undertaken with members. Members of most occupational schemes are currently being sign-posted at retirement to Pension Wise and then either to advisers or to investment pathways. How is this working? Would trialling a CDC pathway be worth considering?

The right consultation is the one that asks for feedback from potential members . If TPR are interested in protecting members, why aren’t they asking members what their reasons for joining a CDC scheme might be and what their diffidence in transferring retirement savings to such a scheme might be.

And I’m sure there will be people in Brighton and Westminster reading this who will be saying – “but these consultations weren’t designed for people who want to swap their pension pots for CDC pensions” –  that’s true – but that’s where the gap in the market is.

The market dynamics cry out for an alternative to annuities and drawdown, offering the best of both without the uncertainty of drawdown or the expense of annuities.

But there is no testing here – the innovation of CDC is being legislated for purely within the closed circle of civil servants , lawyers  and actuaries.

None of the questions in the consultation , is addressing the question, “what do people want out of a CDC?“. The entire emphasis is on what large employers need to do to set one up for their staff and how can members can be protected when the scheme goes wrong.

The DWP may be under-resourced but it is not so short of money that it cannot be asking these questions of everyday people who have pots but are worried about how to spend them, people who bought into workplace pensions but find there is no pension.

The DWP got people involved with the  dashboard …

We now have an update from the Pension Dashboard Consultation on draft regulations, published today which tells us that

Collective Defined Contribution (CDC) schemes would be required to provide their active members with an annualised accrued value, as well as a projected value.

Deferred members would be provided with an accrued value. These values reflect the values set out for CDCs in the amendments to the rules on disclosure proposed in the Occupational Pension Schemes (Collective Money Purchase Schemes) (Modifications and Consequential and Miscellaneous Amendments) Regulations 2022, which are due to be laid in March.

This suggests that the Government envisages CDC schemes as providing disclosures of annual pensions but not of transfer values.

4. Trustees or managers of a pension scheme which provides collective money purchase benefits
must provide the following value data—
(a) for active members—
(i) an annualised accrued value;
(ii) an annualised projected value calculated in accordance with the scheme’s rules, as if
future contributions continue, and without regard to future increases in earnings;
(b) for deferred members, an annualised projected value based on scheme rules

Once again , we need to consider CDC as  it will be seen by those who use it. While

 PDP (pension dashboard program) user testing suggested that while the presentation of income-based values is important in supporting understanding and engagement. The presentation of the suite of values together – that is, accrued and projected income values alongside each other – aids comprehension further. It is easier to understand what each means if the other is also present.

This relates to DB but is precisely the kind of testing that CDC would benefit from. It is important to understand the difference between purchasing a CDC pension through a CDC scheme such as Royal Mail – which is  acting  much as a defined benefit scheme did and purchasing a CDC pension through a commercial organisation such as a master trust, which is exchanging accrued DC rights. Here the pension is not guaranteed and members may wish to have enhanced property rights (including the rights to a transfer in retirement). In any event they will want to know the basis of their tax-free cash calculation, if part of the CDC entitlement is paid as tax-free cash.

This would mean enhanced disclosures beyond those outlined in section 3 of the Draft Dashboard Regulations

When the DWP consulted on its other flagship consumer initiative , the Pension Dashboard, it issued a consultation with a call to consumers to “get involved”. It’s in the URL!

The Royal Mail CDC scheme has resulted from extensive consultation with members, we need to shape CDC 2.0 around what potential members need and want.

People need to trust the CDC disclosure processes proposed. The dashboard proposals need to be shaped  by asking the audience what they would expect before entering into a CDC arrangement.