CDC is a naked flame in the ammunition dump!

I would urge anyone reading this blog to book 37:42 of their time to listen to Tom McPhail quiz Simon Eagle on how a retail CDC “scheme” might work.

Simon is clear throughout that his expertise is in the actuarial aspects of CDC and not in the governance aspects, the consumer’s choice and the distribution of retail products. I won’t have another go at Simon for talking the language of the occupational pension (scheme, trustees etc) , he is on a personal journey into the challenges consumers face in turning their pots into pensions.

The biggest challenge facing CDC right now is “timing”. The best thing that could come out of Jo Gibson’s DC retirement income consultation (due out early 2023) is for the DWP to accept that retail CDC is nothing to do with employers , does not need the apparatus of its legislation and regulatory guidance and can be implemented as soon as key distributors (those who have our retirement savings) are confident that the CDC product “works”.

My worry is that we are, for the sake of the actuaries and lawyers whose comfort zone is in employers sponsored schemes, having to go around the houses when the coach and horses could be driven straight to the eventual solution, in the center of town!

Let me be as clear as I can. Retail CDC is about either an employer choice (it is a fifth investment pathway) or a trustee choice (it is the default option for those who can’t make up their mind how they want their money back).  These are the only two games in this town.

The idea that a mastertrust would set up its own scheme into which its members would tip their money doesn’t make sense. DC Master trusts do not operatie like this (apart from NOW pensions) . Instead they set up an investment platform which channels the vast majority of money coming in from employers (and the odd individual transfer) into a default saving fund (with a tiny fraction of the money going into actively chosen funds).

Master trusts do not manage the money , they do not manage funds, they certainly don’t manage longevity. They have no competence for running a CDC scheme. All the competence is with the insurers (who know how to manage longevity as annuity providers) , fund managers, who know how to devise  implement and run an investment mandate, and platforms, who manage the regulatory aspects , making sure that what consumers see, is a permitted link to a properly managed fund. All of these functions are outsourced by master trustees. The sole purpose of the master trust is to collect and disperse money to the platform and to ensure that member’s wishes are followed (even if the wish is to make no decision).

So it does not make sense to think of master trusts as any different in their function as a workplace group personal pension or even as a saver selected self-invested personal pension. In practice the only difference between the workplace and non-workplace personal pension is that one gets money from employers and the other directly from consumers.

As the retail CDC product is not fed by the employer but  by trustee default or by consumer choice, the same product can be the end destination for all channels of distribution. This already happens. I can access a BlackRock TDF through an Aegon GPP, through Pension Bee’s Sipp or through Aegon’s mastertrust (and many other ways too). It’s the same investment solution fed by three different providers and channelled through three separate investment platform.

The only difference for the consumer is in the badging, the reinsuring and the pricing of the fund. These are important differences but they are second order – the main event is the BlackRock Target Date Fund.

If a CDC product is to be regulated, it is not to be regulated as a scheme (the mastertrust, or GSIPP or GPP) but at the fund level. The risk is all in the fund, the rest is merely the mechanics of getting the money to the fund.

This is why the DWP are simply getting in the way right now. I hope that they, along with Simon and WTW will quickly conclude that the business of regulating CDC multi-employer schemes (whole of life or decumulation only) is no more than ensuring that the platform these schemes use is using permitted links and that the choice architecture (default or investment pathway) is compliant with the existing master trust regulations.

All the stress testing of a CDC fund, the approval of pricing and oversight of the investment strategy and assets purchased, is a matter for the FCA and not the Pensions Regulator. The DWP and the Treasury need to be clear that retail CDC is a product fed by occupational pensions but digested by the FCA’s fund regime.

Until the FCA are bought into the process, there will be no material advance. They may already be being brought into the DWP’s retirement decisions review, though the disparaging remarks made of them by Guy Opperman (referred to in the podcast) suggest that the DWP had not worked out that the FCA will be critical to any expansion of CDC.

And herein lies the final reason why Simon, WTW, the DWP, TPR and any other stakeholders need to work together on this. CDC is not aiming to  disrupt insurer or adviser margins but you can be sure that the ABI  will be looking very nervously at the capacity of CDC to erode a very valuable part of the DC ecosystem. Currently there is no cap on the DC decumulation product and no limit to the adviser fees that can be loaded into it. So these kind of fee levels are acceptable

But CDC is likely to be operating at a much lower total charge than any of these options. It is therefore possible that it will take money not just directly from the workplace savings accounts but from the investment platforms operated by SJP and the other SIPPs whose charges are illustrated above.

So with the new Consumer Duty now  in operation. The CDC decumulation option (as I still have to call it) will challenge both annuities and advised drawdown as sources of value for insurers and regulated advisers.

WTW are to some degree, exploring the ammunition dump in the dark. They are doing so with a naked flame that could set all kinds of explosions off. It is very important that we establish now (eg through the DWP’s upcoming review but also on the blogs and podcasts that follow WTW’s fumblings) what retail CDC actually is.

I and others like Tom, need to bludgeon WTW into getting a grip on consumer choice and what can realistically be achieved and by when, to solve the massive problem people have turning pots to pensions.



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 CDC is a naked flame in the ammunition dump!

  1. John Quinlivan says:

    Henry there are a great deal of challenges. Firstly let me say that risk pooling is needed in later years and this aspect of CDC as envisaged is a big plus. The five major challenges as i see them are

    1/ Having a mark to model product alongside mark to market products in the retail space brings with it so many issues. Generally mark to model is used at instituional level across banking and insurance.
    2/ Introducing a completely different approach into a world already viewed as complex has to increase overall complexity. So communication challenges abound.
    3/ This is made even more challenging if each CDC provider hass discretion over modelling with regard to assumptions.
    4/ The modelling i have seen in the past has disregarded spending pattern needs, thereby putting too high a value on the pooling and return seeking asset dividend at later life. It has to look at this from a utility rather than economic perspective. Some of the dutch CDC structures seem to factor this in by phasing to traditional annuities at age 80 or so.
    5/ Business cases will be very challenging unless CDC is the default, which is really hard to see given the emerging pot sizes post AE. This will put more pressure on the need for a living will and comes back round to the challenge of model differentiation in the event that CDCs need to be merged

  2. Allan Martin says:

    For further considerations and some good challenges on CDC (smoothed) investments and costs see –

    A general search on the I&FoA website is another story!

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