For CDC to realise its potential – it needs to find its customers

The Government is clearly serious about CDC

This from the letter from the DWP to the Work and Pensions Committee on Monday.

But the DWP has to accept that there is little evidence that master trusts of other kinds of multi-employer schemes have any more intention to adopt CDC as a “scheme”.

The demand for a better pension option is likely to come from DC savers who don’t trust either drawdown or an annuity to provide them with an adequate pension over time.

Individuals buy the idea that flexing their pension so it can go down as well as up , is likely to deliver them more over time. The idea that you received a pension based on the best endeavours of an organisation you trusted is not so fanciful as it sounds.

Let’s suppose that DC schemes were able to advertise to members a CDC option that members could use as an alternative to saving for a pot. Let’s suppose that this appeared to members as a target pension that grew with every monthly contribution and was paid with inflation protection with options to accelerate the pension by transferring in other DC pots or even (gulp) opting to swap a DB promise for an accelerated  CDC promise?

There is a lot to be said for this kind of approach, especially if you could choose to remain building up money in a pot – and exercise pension freedoms. The obvious candidate for a conversion from a unit-linked accumulation to a CDC accrual – is Nest.

If Nest were to commit to convert to CDC then it would throw down a challenge to its rivals and we might see action.

But I see this approach as too ambitious for today’s market. I cannot see this delivering value to today’s savers. We have been planning the first CDC scheme of this type for six years now and it is still not ready to go. We need options that can be delivered to savers who are already at the end of their savings careers.


Two ways of doing it

There appear to me two practical ways forward for CDC. Firstly, we could see the rise of a CDC fund, a non-insured investment option that could become either an investment pathway or the default fund for people who “want things done for them”. Such funds are already being constructed in Canada and Australia.

The second way forward is to allow occupational pension schemes to allow a flex of retirement income so that not just indexation but the nominal pension was conditional on the capacity of the scheme to pay its pension promises.

While this would require people buying into the pension (perhaps with a “transfer in” of DC pots or a transfer of DB rights as a CETV), the option to get their pension paid without any guarantee other than that it would be paid so long as the pensioner survived.

The downside is obvious, loss of certainty as to the pension in payment, the upside would be higher initial pensions and the prospect of greater increases as the fund from which pensions are paid is invested for growth.

Running an occupational pension scheme with a non-defined pension seems a heresy to people who have been brought up on the sanctity of the pension promise, but it is the starting point for CDC and I do believe that running a pension scheme on a “best endeavours” basis is practical and could be popular.

Pensions without the support of a sponsor

What both visions of CDC have in common, is the idea that pensions can be payable without the guaranteed of either an employer or an insurer.

Again this seems too radical for our very conservative pension industry. But it s into an important source of support for pensions, the accumulated pension savings of individuals.

But unless we accept that we need to share investment or mortality risk with each other , I can see no way forward for CDC. CDC cannot depend on employers or master trusts providing some kind of backstop- the pension promise must be independent of any “insurer of last resort” and be dependent on the management of the CDC scheme acting in the mutual interests of all participants.

I think that there is a real opportunity for CDC to prosper if its targeted customer is the DC saver looking to turn pot to pension.

For here is where the demand for change is most prevalent. People do want pensions from their pension savings and the establishment of a means of transferring savings into what the OECD call ” a non-guaranteed annuity” or into an occupational pension paying a non-guaranteed scheme pension is the immediate opportunity for commercial pension operators. The idea of a retail pension superfund is one I would support.

For CDC to happen, Government is going to have to intervene in a meaningful way and accept that there are alternatives to the models that have prevailed for the past thirty years. A mutual fund providing a non-guaranteed annuity, a pension mutual providing non-guaranteed scheme pensions, both ideas are practical ways forward for CDC

And while I don’t see such funds  happening in the next couple of years, this is a period when a serious review of how we organise “choice architecture” for non-advised savers, could begin. So of course I support the Government’s intentions and will do what I can to promote CDC alternatives which will actually get used.

About henry tapper

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