In a recent blog I argue that the latest consultation on CDC will not get off the ground. It assumes that CDC has employer support and it assumes that DWP can run multi-employer schemes and decumulation arrangements through TPR’s CDC framework. It is so wrong on this that I have called the CDC consultation a “non-starter”.
Two options going forward
If Laura Trott wants to leverage the £800m loan it has made to Nest, it could tweak Nest’s tail and turn Nest into a whole of life CDC scheme. This would sort out most of the problems we have with workplace pensions but will be hard to do. If Nest went whole of Life CDC then the rest of the master trusts would have to seriously consider following. The DC landscape could become a CDC landscape in 10-15 years and the Government would have taken its boldest step since abolishing the need to buy an annuity with a DC pot.
Alternatively, she could by-pass the CDC framework and work with the FCA (and PRA) on pot to pension arrangements. These could be set up to offer the equivalent of non-guaranteed scheme pensions or – in the retail space – non-guaranteed annuities paid from non-insured funds regulated by the FCA
I can only see either of these nuclear options happening if the DWP and Treasury are on the same page and sharing a vision where our pension system pays pensions, where tax-relief buys the taxpayer a pension not a wealth management system and where the PRA and BOE drop their implacable opposition to pensions paid under best endeavours rather than promises.
When auto-enrolment was first mooted, there was only indented to be one provider – a state owned DC fund which became PADA which became Nest. The insurers said that they didn’t want to do the job and prior to 2010, Now , People’s Pension , Smart and Cushon weren’t a thing.
The insurers and the commercial master trusts became interested when they saw just what an opportunity Nest had.
The argument for making Nest go CDC is just the same. None of the master trusts (even Lifesight) are going to take the risk of “going CDC” as “first mover”.
Nest is big enough and well-financed enough to make CDC happen – even if it is at a huge initial loss to the public purse. I am not sure it would be, but it would certainly involve an enormous investment in systems, communications and in future-proofing to turn those target date funds into the pipes for CDC. It might be that the whole kaboosh would have to be re-engineered , it might be that there is a just transition that is fair to all but Nest going CDC could cause the mother of all debates and such a flurry of consultations that we could still be talking about this in ten year’s time. It took 30 seconds to bring in the pension freedoms mind! It’s up to Government to call this!
A pot to pension solution
Once you accept that demand for CDC is from consumers wanting a “done for you wage for life solution paying more than an annuity”, then your conversation starts and ends with the PRA and BOE and whether they will let you you run pensions on a best endeavours basis.
The evidence so far is that they won’t. We are still awaiting the response to the DWP’s 2018 consultation on Superfunds. Five years on from the bright idea of non-insured pension buy-out being promoted by an enthusiastic young pension minister called Opperman, superfunds have failed to take a penny in liabilities and are now regarded as a holding pen for insured buy-out.
But we have this in the foreword to the CDC consultation from the new enthusiastic your pension minister Laura Trott
By extending our secure and dependable CDC framework, more members will be able to benefit from the opportunities of sharing risk. This means their pension savings work harder for them, and provide, on average a better outcome for their retirement than might otherwise be available.
I can imagine a CDC framework that was retitled “a framework for non-guaranteed pensions”. That could include what the DWP is looking for – but it would have to share regulation with the FCA as the “decumulation only” product could either be seen as a scheme pension paid from a commercial occupational pension scheme (such as a superfund or similar) or as a non-guaranteed annuity paid from a non-insured retail fund.
The DWP say that it has seen no such thing as a decumulation only arrangement. Clearly they have not been looking around. These arrangements are coming in in Canada, with the help of Government legislation and they are being promoted in Australia as part of the Retirement Income Covenant. There are versions – albeit closer to collective drawdown with mortality pooling in the Netherlands, Sweden, Germany and even Japan are all moving toward a non-guaranteed pension arrangement that allows individuals to choose to share the risk of the nastiest hardest problem in pensions.