As CDC becomes mainstream – lets “KISS” – CDC’s just a non-guaranteed pension.

First a tribute to the people who have made CDC happen.

This is the first time I have put CDC in the title of a blog expecting it to be a turn on not a turn off to my readers. CDC is becoming mainstream because of a handful of visionaries of which I am not one!

My first Blogs on CDC were in 2009 when I was coming under the tutelage of the recently retired, Andy Young, who ever since we met in 2002 has told me that CDC should have taken over from Serps as the way to provide an earnings related pension for those not interested in pensions.

In 2010 I started working with Derek Benstead at First Actuarial who explained to me how a whole of life CDC plan worked.

I started attending lectures by David Pitt-Watson on the greater efficiency of CDC as a means of turning contributions to pension – relative to DB or DC. Following the introduction of Pension Freedom in 2014 , I started thinking of CDC as an alternative way to turn pot to pension as a default decumulator.

You could say that CDC is in my blood and that’s thanks to hanging around some pretty clever people, including the above and Con Keating, Philip Bennett, Kevin Wesbroom , Hilary Salt  and most recently Simon Eagle andAdrian Boulding, all of whom I consider  teachers.

There are others, we used to call ourselves “the friends of CDC”, now CDC has too many friends to make that a manageable entity

Pensions are now a broad church.

Hymans Robertson published a report this week which you can download .

It lists the various options available to savers to turn pots to pensions and includes not just CDC, but annuities, income drawdown , later life annuitisation and longevity pooling.

They have produced this chart to show the features of each and their relative strengths and weakness.

It’s time we got a grip on what we mean by CDC and focussed on the simple word “collective”. To my mind, where risk is being pooled but benefits are not being guaranteed, you are in CDC, where benefits are guaranteed you are not, where there is no mortality pooling you are not.

The Dutch have moved from a whole of life asset pooling solution – similar to Royal Mail – to a “choose your own investments but your still in the longevity pool” solution. It is not as collective , but it is still collective, and it’s still DC – because it is funded with a defined contribution. To my mind it remains CDC!

The temptation is to replace the acronym CDC with “risk-sharing”, but that – like the word “pension”, is too broad a church, we need to tie CDC down, especially as Government is now promoting CDC not just as a whole of life solution (Royal Mail) but a multi-employer solution and now as a way individuals can concert a pot to pension (decumulation only CDC).

If we were to divide the Christian religion into Catholic and Protestant, we could miss out all the types of Catholicism and Protestantism. Let’s try and keep Pensions simple, pensions are guaranteed and not guaranteed, drawdown is not a pension – it’s a cashflow management system.

CDC is quite simply a non guaranteed pension funded by a defined contribution.

What is the Government’s CDC agenda?

The reason I think Laura Trott is so taken by CDC is she sees it as bridging the gap between DB and DC in a way that is much closer to Andrew Young’s vision of funded SERPS. Trott wants equality of opportunity for savers and she sees DC schemes levelling up to DB. She may also be thinking that some DB schemes might be better off floating benefits through CDC and abandoning guarantees for future accrual (we are beginning to see this happen as USS debates conditional indexation.  This is not the explicit agenda of the Government. But debates on the nature of guarantees are also prevalent in discussions between pension consolidation (into DB pensions that can risk share) and buy-out (into annuities that don’t).

The Government’s CDC agenda is very much about risk-sharing, though it is explicit that CDC is for it a kind of occupational pension scheme. By thinking about CDC as a scheme, the Government is narrowing the definition of CDC and excluding the longevity pooling of funds that we currently know as “unit linked and with profits annuities”.

There is infact a type of CDC, referred to by the Work and Pensions Committee as a “contract-based CDC”, where there are no trustees and savers simply buy into a fund which pays an income based on a pre-determined pricing mechanism with the ongoing distribution being established formulaically or on a discretionary basis by the pooled fund manager. This only differs from an annuity because it is not set up under insurance rules, it sits outside the strictures of solvency II and can be either an option on a SIPP platform or a Trustee investment plan.

I believe that if there is a Government agenda for CDC, it is an inclusive agenda and should allow for both CDC schemes (what the DWP think of as occupational CDC) and CDC funds (what the WPC call contractual CDC) and frankly we need regulation which protects members and gives them equal opportunities, whatever type of workplace pension or SIPP they’ve built their money up in. Note – the self-employed – who hardly get a mention in recent Government pension papers, need access to CDC pensions too.

The Government’s CDC agenda is about levelling up and inclusivity and we should therefore be talking about CDC as anything which produces a non-guaranteed pension from a defined contribution. Whether that defined contribution is from payroll or a single transfer from a pre-saved pot, makes no odds. All CDC is covered by a definition on non-guaranteed pension , a wage for life that can go down as well as up.


About henry tapper

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