Nihilism has no place in CDC pension policy

This tweet is nihilistic and wrong

That he wants to annihilate CDC is literally in the tweet. He may feel he is doing the public a favor but he is not – he is peddling financial illiteracy, which for someone who describes himself on his twitter profile as “the founding father of pension scheme de-risking”, is disgraceful.

CDC is a means of paying pensions at a target rate (not a guaranteed rate) and that target is set based on the period that the CDC arrangement is likely to pay out income. We can call this its duration and if a CDC arrangement was full of 60 year olds, it would be likely to pay over (say) 27 years (that’s how long you can expect to live if you are 60 today).

The adjustments to CDC pensions that John Ralfe reckons should be made against the first year’s fund value, should in fact be made against the future value of the scheme.

Let’s say that the arrangement has 10,000 savers with £50,000 on average invested. That means there is £5 billion in the arrangement, if the pot falls in year one by 11%, the value in the arrangement falls by around £550m.

But the arrangement is not planning to stop taking money after the first year, it is planning to get to steady state over decades.  The total value of this CDC arrangement by 2050 should  be closer to half a trillion pounds than a few billion.

Those people who have transferred their pots into the arrangement have been promised an annual  pension rate increasing by CPI each year. The cost of the CPI promise is huge, let’s say that over the 27 years ahead, it has a value today (a net present value) of £100bn. What that £550m fall in the value of the fund represents is a tiny fraction of the future fund and indeed of the value of the future indexation. So the 11% fall in value of the fund is managed by adjusting the amount of future indexation (maybe by 1% for a year or two) , not by cutting today’s pensions by 11%.

I am not saying that there might not be a situation where a CDC pension would have to fall in value. If over time the returns continue to fall below expectations , the indexation may have to fall further , it may have to be turned off and in the last resort there may have to be a real cut in the CDC pension.

It is possible to point to world markets which have had sustained falls over time but it is unusual for investments across many markets and many assets to make such a dent as to require a real fall in pension paid. This is because CDC pensions need to be thought of , not in terms of the mark to market value of the assets , but on what the assets will be – according to the business plan of the scheme.

There has been  modelling on this done by Aon ,Willis Towers Watson and others – (including First Actuarial). The modelling tells them there have only been two years in the past 100 when real cuts in pensions would needed to have been made. Admittedly, this modelling was done on a whole of life model.  The model under consideration for “decumulation”, may require more adjustments but there is a world of difference between what John Ralfe is tweeting and what a successfully executed business plan delivers.

That is not saying that running a CDC arrangement is not without risks

Executing a CDC arrangement is not achieved over a few months or a year but over decades. We should remember that the great funded DB plans started with no more than a CDC arrangement would start with today.  They too became multi-billion pound schemes over decades, their managers , sponsors, trustees and members had to be patient.

What is needed for a CDC arrangement to pay a sustainable income for life are three things

  1. A source of new savers with reasonable sized pots to get things going
  2. Regular replenishment of new savers each year, with pension pots to invest
  3. Sound management of the CDC arrangements investments, distribution and administration over decades.

All this takes some organising but it is perfectly feasible so long as there is an expectation that the arrangement is permanent and sizeable and responsibly promoted to the public.

If the business plan is not right, then such  a CDC arrangement would fail, we should be arguing about the feasibility of the business plan, not the fake news that John Ralfe is peddling.

There are 700,000 people reaching that point when they stop retirement saving and stop working each year. On average they have DC savings of between £60,000 and £40,000 depending on whether you listen to the FCA or ONS. My £50,000 approximation is based on net disposable capital from around 1 in 70 of those retiring. The other 69 can annuitize, take their fund as cash, save it for the next generation or drawdown. I suggest that with proper management and the promotion that has come behind other pension innovations (auto-enrolment, dashboard etc.), the establishment of a CDC pension culture could happen within the next ten years.

It is totally irresponsible to take money for such an enterprise until the arrangement is approved by all stakeholders – Government, regulators, providers of the arrangement and the investing public and their consumer champions. This is going to take time.

Nobody is going to set up a genuine innovation in the market unless it is likely to last a long time, be extremely well funded and to do what it says it is going to do.

Is CDC ambitious, yes. Is the available market huge – yes. Is there a need for an alternative to drawdown and annuity as a means to turn pot to pension – we think yes.

But it is equally irresponsible to annihilate the proposition as John Ralfe has done.

I am not an actuary, these numbers do not form part of a model and are based on my clear understanding that is graphically explained by this graph

So long as a CDC arrangement is run on the basis of staying open and can manage the three factors mentioned above, it will provide better pensions over time than alternatives, because it has innate advantages. I will not promote these advantages here, but am happy to refer readers to other blogs on CDC by myself and others which can be found by typing “CDC” into the search facility of this blog (look top right of the page)

The business of cheap shots

John Ralfe is – further to the above – claiming that it is illegal for CDC to operate in the way I have outlined above.

He has not given me any reason to suppose that you can use “conditional indexation” in this way and as Steve Groves points out, the draft regulations for CDC (the tPR ones) refer to the adjustment of indexation as integral to the CDC model

Have we really spent the past fifteen years getting to a point where a CDC arrangement can do more than ape drawdown? John Ralfe is wrong on his reading of the regulations and does not understand what Simon Eagle and others are talking about.

Rather than engage- he chooses to make unwarranted challenges on social media

I am sorry to see that cheap shots are not the sole province of John Ralfe and his accolytes.

Damian Stancombe has decided to get in on the act with a similarly cheap shot

This is silly stuff Damian and beneath you.

This trivialisation must stop

John Ralfe continues to  taunt me with references to my taking orders from CDC HQ. None of this has any purpose other than get cheap laughs. There is no CDC HQ, I am not in the pay of anyone – my search for a better pension option for DC savers is only self-serving in that I am a DC saver and want to turn my pot to a pension

There is no reason for this or for references to “arm waving” or “magic beans”, which John enjoys the look of on twitter. His latest merriment involves repeated postings of me in an elf costume.

All of this is a bad look. People deserve better from those who hold themselves out to be expert. John Ralfe’s antics extend beyond twitter.

When he was asked to argue his nihilistic case at the recent corporate adviser conference he found support for him eked away from start to the end of the debate. He was rude to the audience and the organisers by talking to a subject (Royal Mail) that was not under discussion.

John Ralfe has asked me for an explanation to his facetious and silly tweet and I have set this out in this blog. I fully expect him to rubbish this and go on rubbishing my and others efforts. But in the end, his rudeness and belligerence will peter out and we will have better pensions.

Nihilism has no place in pensions policy, we need to strive for better and resist attempts to stop innovation  and improvements to the pension system.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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