I am sorry to have upset Ros Altmann in what she sees as a personal attack on Pension Wise, I am not against Pension Wise as an institution, I think that the Government are expecting too much of its service , most notably that most people will use it and find it useful. At this point in its development it is like a helpful person standing at a crossroad telling people where each road goes. The four investment pathways are not leading to the destination most people want to take, none are leading to the kind of pension people think they should be getting for the money in their pots. So the person at the crossroads is thanked for do0ig a great job, but people are left unfulfilled. Most importantly , people are not going to their friends and telling them to use the service, Pension Wise should by now be a much loved institution – it isn’t.

Something is missing. That something is the product that people really want to hear about, the successor to the annuity that does what an annuity does – but better!

Something that does what an annuity does, but better.

That is my definition of CDC. For most people it will be simply an annuity purchased with the money from their pot, at a better rate but without guarantees that the annuity rate will remain at  a certain level. This has variously been known as a “variable rate annuity”, “unit-linked annuity”, “with- profits annuity” or “investment annuity”. All of these phrases are roughly interchangeable with a contract based CDC plan.

So in a sense,  a contract based CDC plan is already here, but it is needing a “reset”, it needs to shed itself of the excess baggage of the past and start afresh. All of the residual guarantees, the opacities and the exclusivities that made these products “niche” , need to be thrown out and they need to be renamed and launched as CDC pensions.

“Contract” or “trust” based makes no difference – the product is the fund not the scheme.

This is the FCA response to the challenge set down to it from the Work and Pensions Committee and the DWP.

We are supportive of the Government enabling Collective Defined Contribution (CDC) schemes in the UK. Should the government legislate for multi-employer CDC schemes, FCA-regulated firms could in the future operate trust-based CDC schemes, just as some insurers already operate commercial master trusts.

Given this early stage of implementation of CDC schemes in the UK, we are not yet able to determine the prospective level of demand for contract-based CDC schemes regulated by us.

This may become clear as the market for these through master trusts develops. That development may also inform thinking on the details of a regulatory framework for contract-based CDC schemes. We note that decumulation-only CDC schemes would need to be confident of a future flow of business to get to scale.

A more natural progression might be for an established commercial CDC scheme to open its proposition to decumulation only clients.

Protecting pension savers–five years on from the pension freedoms: Accessing pension savings: Government and the Financial Conduct Authority Responses to the Committee’s Fifth Report – Work and Pensions Committee (parliament.uk)

The statement misses one crucial aspect of DC pension savings – that it is “money purchase” and that the money (the pot) in a DC plan, is supposed to purchase either

1. An annuity
2. An inheritable death benefit
3. A cash sum paid into a bank account
4. A string of drawdowns from an investment account….. to which I would add
5. A CDC pension

The only difference between a CDC pension purchased from a master trust (or other occupational DC scheme) and from a contract based personal pension is the ownership of the plan. In a contract based CDC, the plan is owned by the beneficiary of the income, in the trust based arrangement, the plan is technically owned by the trustees (though the beneficial owner is the saver who has all rights on the fund that pays the income).

So I will be arguing to the FCA, that not only do contract based CDC funds exist today, but they could , subject to reorganisation of the investment pathways, become the fifth and dominant investment pathway, purchasable by savers at the point they decide they want a lifetime income paid as a CDC pension.

Which suddenly makes Pension Wise a much more potent and valuable service as it becomes the agent of education and change about this new type of plan, which not only makes sense as the dominant pathway, but makes sense of all the other pathways, which do things that CDC cannot do.

My response to Ros

In her comment on my blog, Ros and I are heading in the same direction, but we aren’t on the same wavelength.  I don’t mind that, so long as we end up in the same place. I hope when she reads this blog she will see that what I want from CDC is very similar to what she wants from DC – an upgraded annuity which swaps a little security for a lot more income. This isn’t pulling a rabbit out of a hat, it is just an acceptance that the annuity has become a problem product to be the default “money purchase” from a DC pension. The CDC pension is that default and will become so over time as people get used to it paying more income without unwanted stress on their finances.

The FCA should engage with this new way of seeing CDC and not wait for the Royal Mail CDC scheme , the multi-employer schemes that may follow and then an assessment for demand for a fifth investment pathway. They should get on the front foot now (as should Ros) and rethink the whole concept of variable ~(non-guaranteed) annuities so they can be delivered to an awaiting public with the help of Pension Wise!