Perhaps the most unreported headline of the week, at least for pension nerds like me was Guy Opperman’s prediction , made at an RSA CDC event that Nest would be a CDC scheme by the end of the next parliamentary term (by the end of the decade).
So what do we make of that?
It may be that the Pension Minister is thinking of Nest as “his department’s scheme” and that it will simply fall in line with his legislative timescale
- Large occupational Pension Schemes turn CDC (2023-25)
- Master trusts turn CDC (2025-27)
- Decumulation only Schemes set up (2026 onwards)
The figures in brackets are my best guesses of what is in DWP’s and the Minister’s mind.
This would mean that Nest could open its doors to employers who wanted to fund CDC at meaningful rates and get Nest to convert contributions to CDC pensions from 2025. Personally, the thought of putting 10%+ of payroll into Nest doesn’t look appealing to an employer (but I may be wrong).
It could mean that Nest could start converting its pots to pensions as a CDC decumulation scheme at some later point in the legislative and regulatory timetable. The thought of Nest as a place where you can turn your pots to Nest pensions is much more appealing, especially to savers who are fearful.
Nigel Stanley, who chairs Nest’s Member Panel, cottoned on to this latter interpretation of what the Minister meant. He talked at the Trade Union Pension Conference yesterday about Nest as a place where its members might be able to bring their pots together and get them paid as another pension – (a CDC state pension?)
Will the competition wait?
The way the Government’s timetable is being laid out, master trusts are being primed to take on smaller employers who want to concert from workplace DC to workplace CDC pensions.
“Smaller” in this context , means smaller than Royal Mail but bigger than the employers who have only the means to pay a minimum AE contribution (so bigger in terms of their pension spend).
It may be that come the consolidation of the smaller occupational DC schemes into master trusts, there are many employers who- there being no barrier to doing so, would allow their master trust to convert them to CDC. My worry that tPR’s CDC code will be a big barrier was a little allayed by conciliatory noises from the DWP at the RSA event about proportionate regulation for smaller schemes, but I wonder how much value these employers are going to give to the concept of “whole of life CDC”. Whole of life CDC is how CDC people talk about the Royal Mail scheme, a scheme that is defined benefit in all but guarantees.
My suspicion is that most employers with DC schemes (whether their own or as participators in a GPP or master trust) are not seeing the benefits of a whole of life approach and are much more concerned about the behavior of their staff when they come to take their pension pots.
The provision of a scheme pension option which allowed pots to be converted to pensions would be a big win for many employers worried that their staff could make stupid decisions about how to drawdown from their pot or simply stay on working because they can’t take a decision.
As was said by Nigel Stanley several times, savers into Nest are expecting Nest to pay them a pension, Nest being a pension scheme. Participating employers in Nest are probably expecting that too, if they think about pensions as a way to help people out of the workforce.
This suggests that there is mounting commercial pressure on pension providers of all kind, to provide pensions for all this saving. I suspect that master trusts and indeed the insured GPPs will not wait for the Government timetable but will look for ways to offer “a pension for a pot” sooner rather than later.
The race is on to find a way for master trusts to turn pots to pensions. They will seek to get the jump on Nest.
Nest’s problems with “decumulation”.
Nest has long struggled with the worry that it doesn’t pay pensions. Before Osborne’s announcement that nobody would have to buy an annuity in 2014, Nest had been looking to offer an annuity service that offered a carousel where you got the next annuity that turned up as the roundabout swung round. This was of course totally insane and never happened but Nest got as far as naming the insurers to sit on the carousel and screwed preferential rates out of them.
But once the freedoms arrived, Nest continued to want to provide pensions, inventing a Heath Robinson looking scheme which provided a combination of drawdown and a deferred annuity which was considered a proto-type of CDC and part of the Defined Ambition program put in place by Steve Webb. This idea was shot down by the ABI and others as using Nest’s preferred supplier status to distort the market, so Nest the remains the world’s biggest pension scheme not to provide a pension.
Unsurprisingly , Nest is currently keeping its powder dry and despite comments from the Minister, is making no commitment to CDC. Nigel Stanley was keen to point out that he was not on the Nest executive and didn’t have a say in what Nest members got (I’m never quite sure what influence the Nest’s Member Panel has .)
Will Nest tow the party line?
If I’m right, then what is likely to happen is that the master trusts will decide to do what the Australian Supers are doing and offer members a fund that pays them an enhanced pension. My friend Jim Hennington explains..
My guess is that what happens in Australia today, happens in the UK tomorrow. If this kind of fund can sit on an investment platform in the UK as a permitted link, then it could be offered to master trust members, savers into workplace GPPs and to those in non-workplace SIPPs. In short, CDC style pooled funds would be generally available to anyone – including the self-employed and those without access to a workplace for lack of AE eligibility.
Since this kind of fund , fulfils the needs of a member as Nigel Stanley saw it yesterday, why would Nest wait? If the only reason is to follow the Government’s timetable then it will be putting retiring members at a disadvantage. Nest’s Trustees cannot do that.
Understanding the market dynamics is crucial
Is CDC about employers or about members. If it is about employers , the CDC code will be followed and CDCs will be rolled out as per a version of the timetable above.
But if CDC is about members, those who have, are and will retire with pots but no pensions, then the market is about offering fund options, either as a pathway or as a default , which can do the job.
If CDC style pooled funds (as described by Jim) are permitted in the UK , then the need for decumulation only CDC as a scheme, all but evaporates. CDC is delivered using existing pension platforms as a fund-link and not as a scheme.
Understanding this market dynamic, leads to an opportunity that those with the capacity to create pooled longevity funds,( investment annuities – call them what you will) should be seizing with both hands.
Many of today’s DC plans will deliver inadequate pensions. What we heard at TheRSA was that if they upgrade from DC to CDC then for the same contributions they will deliver pensions 30% to 40% higher