The Royal Society of Arts hosted an online session last week on “decumulation only” CDC . It was an opportunity for Adrian Boulding to speak with an audience of master trusts, insurers and asset managers who might provide services to such arrangements.

It is taking a very long time , but I suspect that the concept is at last taking shape. Adrian, who is a plain speaking man, explained CDC in terms that any member of the public could understand. If the aim of the session was to start “normalising” CDC, it was a success.

So what is the vision that CDC would play as a normal part of  our retirement finances? I paraphrase Boulding’s explanation of what CDC could look like in years to come.

“Someone will be able to choose to transfer into a CDC arrangement a sum of money in return for an income for life , paid like an annuity but with a more ambitious and less defined pay-out”

This is a very different idea than the concept at the Royal Mail where

“Someone becoming an employee of Royal Mail will be able to join a scheme that will accrue rights to an income for life paid like an annuity but without the guarantee that income will never go down”

Though the benefit of both types of CDC are fundamentally  the same, what Adrian is talking about depends on someone accumulating a pot of money outside the CDC arrangement whereas Royal Mail are inviting staff to join the scheme when they join the workforce. There is no DC pot that gets transferred into Royal Mail’s CDC (it’s Collective Pension Plan).

So decumulation only CDC is – conceptually – an investment pathway that a saver could choose as an alternative to cashing out, leaving the pot as an inheritance , purchasing an annuity or drawing down from the pot with total freedom. It is a pension for those who do not want freedom nor an annuity – who are happy to accept investment risk in exchange for a more ambitious income.

Key to the achievement of the goal of a more ambitious income is “collectivity” – it’s the primary C in CDC. The idea is that people can pool their saving to socialize the risks of an individual drawdown arrangement, achieving economies of scale and employing experts to ensure that the pension is managed to guidelines prescribed in law. The law is set down in the Pension Schemes Act 2021 and in the Pension Regulator’s CDC Code. This Code and legislation currently caters for the type of CDC that Royal Mail is using, the type that Adrian was talking about needs more work.

Adrian has publicly stated that he thinks it would be possible to have legislation and regulatory coding in place by the end of this parliamentary term so that people could exchange their pots for CDC pensions as early as 2025.

Estimates vary, but the consensus of expert opinion is that CDC could have the ambition of paying between 30 and 40% more than a conventional annuity over time, either through a better conversion rate of pot to pension , or a better rate of increase in pensions or a combination of the two.

Adrian described the use of increases “conditional” in payment on the scheme meeting its goals, as the mechanism of ensuring the scheme was not paying too much or too little. Rather than holding back a buffer of money that could be used to bail out the arrangement in lean times, the rate of increase (projected over decades to come) could be used to avoid actual drops in the real income those in the arrangement receive from year to year.

Adrian was keen to point out, that in extreme circumstances, the arrangement could actually reduce payments. Aon have done a lot of modelling on such circumstances and have found only two such years in the past 100. Never the less, no one who enters a CDC arrangement should be left in any doubt that falls in income can and will happen.

So the higher expectations of income must be balanced against the possibility of the ambitions of the arrangement not being met. CDC is not for everyone and other ways of buying pension are available.

That said, it is possible that over time, CDC will become the standard way for people to turn pots to pensions. We have learned to accept that our workplace pension savings can go down as well as up and the public has proved itself considerably more resilient than many pension pundits supposed.

Living with uncertainty

We live with many uncertainties around our well-being and wealth. We cannot control the value of our houses or our need for healthcare, but we are comforted by being in a collective healthcare system (the NHS), we collectively insure ourselves through taxes.  And that while the value of our houses go up and down (as can the cost of finance), the value we get from our house remains the same. Much of the uncertainty of life is taken care of by using collective services, public utilities as various as the armed forces to the people who maintain the roads in good order.

We also accept that in financial matters things can and do go wrong. The LDI crisis, like most financial crisis’, was was about risk management going wrong.

If CDC is to catch on , then it must tap into the financial resilience and the concept of doing things together that underpin our capitalist society. Which is very much the ethos of the RSA and why I’m grateful of its patronage.

A plan not a scheme

I can’t take issue with the substance of what Adrian said, he made the case for a more ambitious pension clear and compelling.

Where I will push back is about how such an arrangement is delivered. I am not sure it needs to be delivered through a scheme – which means trustees and some residual link to an “occupation”. Maybe CDC is better delivered as a “plan” , where individuals  invest into a fund either through a personal pension wrapper or from a platform operated by a master trust.

“Fund governance” and “scheme governance” could both be subject to the underlying principles of the DWP regulations and TPR code and deliver the same things to people. In practice, many insurance companies already have capacity to run CDC funds and M&G/Prudential’s Prufund and Just’s work on a non-guaranteed investment annuity are knocking at the door and asking to be accepted – just as they are.

If , as Adrian is asking we do, we start thinking of CDC as part of our choices to fund our retirement, then integrating its simple ideas  into what is already out there, means thinking about the entirety of retirement wealth, rather than the specifics of occupational trusts.

We should start thinking of CDC funds and plans, as well as CDC schemes.

Boulding

RSA