WTW take on the nastiest hardest problem in finance – treading the pension pathway.

Some years back, Con Keating failed to convince a similar audience at a similar event about the merits of a CDC scheme as an alternative way to provide a pension. Only 8% of the audience said they’d want to be in a CDC scheme in their twenties and less than one fifth thought that Government should be devoting legislative time to getting CDC on the statute books.

Last Wednesday audience of pension consultants, advisers, providers and other high-level industry stakeholders voted 66 per cent to 34 per cent in favour of offering CDC as a way to help people spend their DC pension pot.  ‘This house believes there is a future for decumulation-only collective DC schemes’.

At the end of the debate between Eagle and John Ralfe, the independent consultant,  support for the motion was greater after the debate than before it,  when an identical poll won 58 per cent support, with 42 per cent voting against.

To a large extent, this is down to Simon Eagle himself, who in his very serious way has convinced Royal Mail, the DWP, the Pensions Regulator and his own organisation that CDC is a viable option for the payment of pensions in what is a DC world.

Now he has convinced a wider public and taken a thumping opposition to CDC to a grudging acceptance. There is clearly support for CDC as a retirement choice and Simon has played a great part in making this happen. I am pleased to see him backing himself and proud to be a fellow traveller.

The debate to come

There are three great challenges for CDC to operate in a meaningful way

  1. We need to create the product. That means getting the proper structure, the regulatory permissions , a pricing model and clear rules about how the product operates. I do not think we are far away on this. Several product managers have started modelling, one has a solution awaiting adoption.
  2. We need to establish what choice architecture works for DC savers at retirement. This is one of Opperman’s legacy projects and it is with Jo Gibson at the DWP. The big question is whether we persist with pathways – where choice is offered , but no direction, or whether we allow fiduciaries to offer a default retirement option, where choice is offered but choice as an opt-out to a promoted solution.
  3. CDC as an equivalent to (but not) a scheme pension, would need to be adopted as that default.

It is too much to suppose that a decision can be taken on the pathway v default debate until we are clear about what the default might be. We have ruled out annuity as the default – George Osborne did that in 2014. We like to think that people are converting pots to an income for life through the use of income drawdown, but the Retirement Income Study and recent work from Corporate Adviser suggests that this is not the case.

The default retirement decision is to do nothing with the pension pot – the most common consumer intervention is to cash the pot out. If this continues we could end up with as big a policy failure  as auto-enrolment’s policy success.

So it is critical that we find another pathway that can become the default pathway for those who don’t want to or can’t take a decision for themselves. I will call it the pension pathway as I don’t think that “decumulation CDC” is going to resonate with the public. It is – as Simon Eagle promotes it, a “done for me” product that pays  a better income for the rest of my life”.

The debate marks a stage in the acceptance of that idea but we now have to establish what the product looks like , convince the DWP that it is could be a  fit for purpose default solution and finally we need the product to be adopted by the great DC schemes – whether sponsored by one employer, many employers or individually invested personal pensions.

It won’t be easy, this is not the solution that insurers will prefer, as it is not an insured solution. It is not an advised solution so it will not win support of parts of the advisory community and it is genuinely new , so it will take time to get acceptance both from the pension community and the public.

But it is the only solution that makes sense as a mass market means of turning pot into a wage for life.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to WTW take on the nastiest hardest problem in finance – treading the pension pathway.

  1. con keating says:

    It is really pleasing to see sense prevailing, at last. Congratulations must be offered to Simon for his perseverance.

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