“Taking CDC out of the hands of actuaries and lawyers”

Mike usually picks up on the real point I am trying to make in a blog. A couple of blogs back I commented on a article written by David Pitt-Watson with help from Hari Mann with their “RSA CDC Forum” hats on.

I am worried about forums which are funded by their participants as they exclude people who do not have the price of admission. Lawyers and actuaries will pay the price of admission because that price enables them to place a moat around them and own the debate.

Instead of becoming a forum, a pay to participate group becomes a fortress.

Having achieved a success with Royal Mail, a success that was crafted out of the political opportunism of certain actuaries and lawyers looking to avoid a damaging pension strike, the CDC lobby is in danger of missing its open goal.

The open goal is that its product is something that – given the choice – many people would choose. Taking the fear of running out from pension drawdown, offering the prospect of a better pension than from an annuity and who would not consider a CDC pension?

Critics claim that it gives false hope because it offers no guarantees and still transfers investment risk from pension scheme sponsors or insurers to individual savers. But that is to live in a past where DB pensions and annuities were affordable and valuable.

Critics also claim that the scheme sponsored version of CDC promoted by the DWP and TPR’s CDC code is aimed at employers and that employers are not interested. In this they are currently right (though there may be enough interest over time (the article’s point).

But most people have no likelihood of ever being in a CDC scheme or even in a DC scheme with a CDC scheme tacked on for “decumulation”. There is little appetite for that among employers and master trusts who look at the substantial costs inherent in the CDC funding code and say – “no thanks”.

For most people, their retirement choices are dictated by their financial adviser or laid out by their provider as one of four investment pathways – cash-out, leave your pension to your kids, spend your pot via drawdown or purchase an annuity.

In answer to Mike’s question.

CDCs can be designed in one of two ways. They can either be schemes run by actuaries and lawyers (with trustees their to make sure the rules and the sums are working), or they can be run by fund managers with the aid of algorithms of with discretionary management). The discretion is likely to be managed by actuaries and the algorithm created by an actuary but the fund itself is simply another investment pathway chosen by a saver with his/her workplace and non-workplace pots to fund it.

The RSA CDC Forum is currently thinking of CDC development as in who will be the next Royal Mail. There may be another but there won’t be many and we won’t be seeing the British Pension System changing any time soon.

However, the idea of a CDC fund as an investment pathway offering “better pensions than an annuity without the risk of money running out” would change the British Pension System.

But for that to happen, we’d need to lever the actuaries and lawyers out of it and allow CDC to become an option that savers, rather than employers chose. We need CDC to be a pension for savers rather than the lovechild or lawyers and actuaries.

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 “Taking CDC out of the hands of actuaries and lawyers”

  1. Laurie Edmans says:

    I am really sorry, or thick, but I still don’t see the real difference between CDC and with profit annuities. One thing I do think I can see that they have in common is that everyone in the industry understands (there being no free lunches) that the ‘better’ pensions can go up or down, but that the people who have them are unlikely to.

    Until that can be fixed – we really do need a population that has a better basic understanding of risk and reward, now that the DB days are gone – a decent slump is likely to see CDCs as reviled as Equitable (I like the idea of CDC, by the way, but if the ups and downs aren’t communicated – which means ‘what is the message that has been received?’ not ‘what is the message which was sent?’ all the good intentions could turn to yet more off putting bad publicity for pensions.

    (And more people saying, ‘I don’t trust pensions – I’m relying on property’. How’s that – a highly popular answer in many research findings – feeling right now?

    Please don’t tell me that the magic difference is the presence of ‘disinterested trustees’. That’s where the non exec boards of mutual life companies started – and where did they finish?

    The industry needs to put some serious resource into getting many more people to understand more. To get the ground ready for good ideas like CDC to take root. Until employees realise the value of decent pensions provision, employers – who are economically rational – will continue to work on the basis that they can get the same result by paying people £1 in immediate cash, rather than £2 towards a decent pension.

  2. henry tapper says:

    Ok Laurie – a few challenges there and I’ll take them on one at a time.I’m talking here of the type of CDC that you and I could use to turn our pot to pension, not the whole of life DB replacement scheme – Royal Mail. I’ll say it again at the end, but this kind of CDC has nothing to do with employers.

    1. This CDC is not with profits 2.0 for a number of reasons. Firstly it is not guaranteeing anyone anything, it is simply paying a smoothed income over time according to its means – which means you could get out less than you put in. It is not an insurance policy , it is an investment fund that pays an income for as long as you live and it has no residual value because when you die, your residual rights to income pass on to others in the fund. Note I’m calling this a fund not a scheme because it is not an insurance but an income fund that lasts as long as you do. Yes it smooths like with-profits and it distributes according to rules (like with-profits before the rulebook was thrown out) but it is not with-profits – it’s a mutual enterprise that is better thought of as a fund than a scheme, It need not be regulated as a scheme , it need not be backed by reserves like an insurance policy.

    2. Secondly, CDC should be priced to provide an escalating income, the payment of the increases is conditional on performances, which means that in bad years , you’d lose indexation not nominal income. But in really bad times your pension could go down – rare. Did you ever get an employment contract that said your wages could never go down? Thought not! If you want more income , you have got to say goodbye to guarantees that say your income can never go down.

    3. Third, I don’t think people need any re-education about risk. People play the lottery, bet on horses , they know what extreme risk looks like. They also invest in houses which most people can remember go down in price from time to time. People have an appetite for “good risk” and make trade offs between risk and reward in all things.

    4. Let’s forget employers and the funding for retirement and think for now about the choices people have with their retirement savings. That’s nothing to do with employers. People want choice but usually they want things done for them by people who they trust to do things right. People still trust pension schemes, insurers and their employers who choose them as knowing more than they do. If they didn’t then we wouldn’t have auto-enrolment.

    5. Right now , there’s no “done for me” pension (other than an annuity). About 1 in 10 of us are prepared to pay the price for annuity guarantees and about 9 in 10 aren’t. We need to focus on the 9 in 10 who currently have no alternative to an annuity but scary drawdown or DIY pensions like buy to rent. There is a big market for what used to be called a scheme pension, an income that aims to increase with inflation but can’t always do so – a bit like the state pension and a bit like occupational pensions, before they marked liabilities to market.

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