I get invites to events looking at the future of CDC, I got two yesterday, one from Dunstan Thomas and one from the RCA (invitation only – no less).
I don’t think that anything about CDC should be invitation only, it is a mass market product looking for public acceptance, the days of a cabal of “Friends of CDC” are gone.
And anyway, CDC resonates frustration, failure in the Netherlands to win hearts and minds and failure in the UK to so much as pay one postal worker a CDC “wage for life”. CDC is currently bogged down in a consultation over a code that will preclude all but a handful of employers from offering a CDC option to its staff,
The argument that CDC should be trying to win is not “how to recreate DB”, or even “how to level up DC” but “how to turn pots to pensions”.
One of the invited asked me if I had a question for the Pensions Minister. I have two and here they are
- Should the 700,000 people accessing pension pots for the first time wait for CDC legislation?
- How long will they have to wait?
I don’t think they want to wait much longer. As I speak with the smart people in the pensions world , I find more who see the answer to my questions need not wait on the “CDC journey” or any “CDC code”.
For what people need right now is not an employer sponsored savings scheme (they have one of those already). Nor do they need suggested pathways (their only pathway is their own). They need a clearly signposted pension option as a continuation of their lifetime savings.
To use the phrases of the OECD’s recent legal instrument, we need our DC pensions to be
“consistent with the other components of the pension system and its objectives, and be coherent across the accumulation and pay-out phases”.
DC pension plans should provide some level of lifetime income as a default for the pay-out phase
Lifetime income can be provided … by non-guaranteed arrangements where longevity risk is pooled among participants.
CDC need be no more than the last switch in a lifestyle default or the destination of a target dated retirement plan. It need be no more than another pooled fund sitting on a pre-existing insured investment platform. In short it can be integrated into a DC structure whether a master trust or a SIPP or a workplace GPP as the default spending option.
And what is it?
I do not yet have a name for “it“. I have heard it called a pooled annuity fund, a pooled longevity fund, even a “modern tontine”. None of which has the resonance of a “pension fund”. But that is what it is. It is a “fund that pays a pension” – but sadly that phrase has been spoilt in the coinage, “pension fund” is a meaningless if not misleading term unless it pays a pension. For now I am calling “it” a “wage in retirement” and under my breath – “an AgeWage“. I suspect we will do what the Australians are doing and call it a “lifetime pension fund“.
The progress on regulation has come from the FCA PRA and Treasury.
Critical to its success is that such a fund be a permitted link. That means the fund is permitted to be linked to an investment platform which is offered to pension savers.
There have been easements in permitted link regulations of late, you can read about them from the link, but what they mean is that you can now do much more within a pooled investment fund than you could in the past. These easements in permitted link regulations are likely to be more important to the “CDC journey” than the direction of travel being taken by the DWP and tPR.
I am told that it is possible to run a longevity pool that credits those who survive with the units of those who die within a pooled fund that is a permitted link. This means that such a fund can sit on a standard workplace pension insured investment platform. It means it can form the final part of a lifestyle or target dated fund switching program.
It means it could also be a standalone fund that could be purchased as an alternative to drawdown or annuity as a means of having your savings paid back to you over time.
Such a fund would have an agreed level of distribution either on a discretionary “with-profits” basis or on a formulaic “unit-linked” basis. It could possibly use the rules of a distributive ledger and be organised as a series of smart contracts between the owner and the manager. But this is infrastructure and for another blog,
For the purposes of fund disclosure, the fund would declare a rate of distribution akin to an annuity rate and be clear about issues such as property rights , changes in distribution , fund charges , reserving and the cost of the reserve.
It is much easier to explain these things as aspects of a pooled investment fund than a pension scheme. People have different expectations from pension schemes.
And why don’t we have these now?
I remember discussing this concept with Mike Wadsworth (then of Watsons) in the late 1990s. At the time, annuity rates were 10% + as were interest rates. The idea of our Money Purchasing an annuity was working fine, the Equitable and a few other insurers dominated the market and unit linked providers such as Allied Dunbar and Abbey Life were building up the wealth which would transform into 21st century wealth management. Mike concluded that “now was not for the time, but its time would come“.
Then interest rates fell back and high annuity rates could no longer be guaranteed, the insurers who had built guarantees into their contracts felt the pain, the unit linked insurers turned into wealth managers or were swallowed up by consolidators. The need for a mass market alternative to annuities was born.
After the false start of Stakeholder Pensions, mass-market workplace pensions were revived by auto-enrolment but not as low-cost DB plans but as pure savings vehicles. The question of how pension pots would turn to pensions was kicked down the road awaiting either the return of high annuity rates or someone else to do the innovation. The view was that DC was too immature to need innovation in decumulation.
For a time I thought that CDC would quickly become the mass market decumulation product that 700,000 people accessing their pension pots each year needed – to turn pots to pension. The average pot accessed is £62,000, still too small to purchase much of an annuity but a reasonably substantial investment into a pooled fund.
Consolidators looking to offer a means to retain funds under management beyond “crystallisation” , are interested in CDC. I thought they would be the DWP’s next set of customers.
CDC becomes a closed shop
But I was wrong, instead of opening up, CDC has turned in on itself and has become the means to manage industrial relations at Royal Mail. There may be other Royal Mails though they are keeping quiet about who they are. The market for single employer CDC is owned by a few of our 10 large actuarial consultancies who , along with the lawyers, are now the friends of CDC.
They have created a relationship with DWP so that CDC can be fashioned to meet the very specific needs of their clients and we are told that master trusts may be able to offer this rare elixir in a year or two’s time. The elixir will be available through participating employers prepared to pay for the privilege- it will not be cheap or quick. Multi-employer CDCs look like being a trophy item.
Now is the time for a fund promising a lifetime pension. We have the market, the regulations and the expertise. Why wait?
We are promised, once we have multi-employer schemes, that the DWP and TPR will turn to the needs of the 700,000 pa who have no pension but only pots. They are not aware that the rare elixir may one day be there’s, instead they are being guided down investment pathways but generally turning back and stripping out their tax-free-cash and waiting for something better to come along.
Should 700,000 people a year wait? How long should they wait?
Or should the market , by-pass the legislative agenda and create pension funds that pay a wage for life, using the existing permitted links legalisation , pooled funds and insured investment platforms?
In the five years since Royal Mail made peace with the CWU over a risk-sharing CDC solution, we have yet to see a single postal worker being offered the proposed “wage in retirement” solution. What we have had instead is endless bickering on social media , Government consultations, primary and proposed secondary legislation.
Meanwhile some three million people have accessed a pension pot for the first time and the FCA’s Retirement Income Survey suggests that they are not doing so to pay themselves a wage for life. Whatever they are doing, they are generally doing without advice and guidance. In the 7 years since the introduction of the pension freedoms we have moved from a restricted to a disorderly market. It is time to restore order and create a way for people to convert pots to pensions using defaults and easy to choose/use funds that pay pensions.
“Our fund pays pensions” sounds to me a distinctive and compelling marketing slogan. I look forward to reading it!