Our intention is that the framework should accommodate schemes providing benefits to unconnected multi-employer schemes and Master Trusts, and to explore how best to provide for schemes offering CDC decumulation products

CDC is an example of how far the DWP has come in the development of its vision “the Mansion House Reforms”. Back in January it published a consultation , which with respect to its authors – fine people – looked cobbled together in a hurry to satisfy a Minister’s intent. I didn’t respond as I didn’t want to rant at a policy team who I knew could and would do better.

Now comes a new consultation, entirely refreshed from what came in January , which gets it. You know the Minister gets it too, her forward (from which the quote above is extracted) shows how the DWP has moved on from considering CDC solely a whole of life occupational scheme and arrived at the concept of the CDC decumulation product.

Whether the value of pooling assets and risk is achieved through a scheme or through a fund is immaterial, what matters is the outcome. My colleagues who have been Friends of CDC for decades, tell me that it is harder to pool and share risk by offering a “retirement only – annuity like product,  but that is where most of the demand is, That does not mean that more ambitious whole of life CDC schemes cannot prosper. The multi-employer-sponsored scheme can sit alongside Royal Mail and other single sponsored schemes that come along. We may end up thinking of CDC as the counterpart of the open DB scheme as we understand Superfunds as the counterpart to buy-out. Ultimately, we are looking at different ways to share risk between members, sponsors and the regulatory lifeboats, PPF and FSCS.

Let’s not get lost in the regulatory weeds

The idea of CDC is to offer more than a DC scheme at less risk. It does so by pooling longevity (something missed in Laura Trott’s foreword) and by investing in a way that produces better outcomes.

If offered as a workplace pension, it becomes subject to the charge cap and needs to comply with minimum contribution standards (the DC input tests not the DB  benefit tests). The DWP needs to guard against getting lost in the regulatory weeds- leave that to drafting. This paragraph shows how easy it is for policy thinking to trip over itself!

We also consider that there is no reason the CDC charge cap, an important protection from (sic) members, should not operate effectively alongside the new Value for Money Framework.

As the DWP acknowledges with regards imposing the master-trust framework on CDC, trying to get congruity between regulations may lead to elegance but it defeats common sense, the workplace pension charge cap has no place in CDC, it was a local measure designed to curb a particular excess, it is now doing more harm than good. It has been superseded by “VFM” and the Consumer Duty”.

The DWP is also right to push back on calls to over-complicate CDC through “sectionalisation”. Sectionalisation is the practice of building in complex structures into CDC design to avoid potential losers in areas such as the drawing of tax-free cash. In the pursuit of a perfect solution, CDC could easily make itself a victim to the complexity of the pension taxation system. If it tries to anticipate every criticism from the tax specialists it will not get off the ground, let alone deliver better outcomes.

Arise the commercial CDC

Encouragingly, the DWP are now talking sensibly about “commercial master trusts”

Overall, it was seen as a commercial decision between the provider and employer if they wanted to assist and how much, and concerns were raised about regulations being too onerous that could inhibit the start-up and development of CDC.

The idea of extracting profit from running a CDC scheme or product, may not appeal to the purist, but it is essential if multi-employer or decumulation models are to develop.

The key word here is “seed”, where does the initial capital arrive from and how is profit extraction measured and regulated? The DWP could reasonably talk to the potential pension superfunds here, the use of Scottish Limited Partnerships to provide a contingent asset to enable a scheme to develop in its early days, is well established. The cost of capital to provide such an asset is recoverable over time. The time taken to recover initial outlay will depend on how quickly assets are taken into a scheme. Decumulation only schemes have the obvious advantage of being funded by transfers of DC pots rather than payroll contributions.

Generally, the DWP could and should look to align the rules covering “fit and proper persons”, the regulation of “pre-agreements” and any caps on charges levied on CDC funds, to what it agrees for Pension Superfunds. Pension Superfunds, master trusts and CDC schemes and products are all riffing on the same strings.

Beware over-prescription

In common with its disastrous failures around the pension dashboard, the DWP seems intent on prescribing what a product should tell members in advance of any proof of concept product emerging. CDC needs a minimum viable product (Royal Mail is the maximum viable product). The MVP should determine what can or cannot be said about it. The DWP should leave well alone prescribing member communications right now. The following statement from the consultation fills me with dread!

We are also exploring with the Financial Reporting Council (FRC) what actuarial standards could be put in place with regards to the actuarial assumptions which must be used in providing illustrations for multi-employer CDC schemes.

Welcome the Scheme Proprietor

The DWP has come up with a new name for the organisation standing behind a CDC- the Scheme Proprietor. This seems to simply rename the Scheme Funder who stands behind the commercial mastertrust.

The CDC Proprietor is of course taking on an obligation to pay pensions , not just build a pension pot, and pay pensions which provide inflation protection too. As such , they are fulfilling the role, in a multi-employer scheme of a pension superfund, rather than a master trust. If the idea is simply to turn pots to CDC style pensions , then the need for a sponsoring employer falls away entirely and the Proprietor is simply acting for the pensioner. More imaginative models than a trust based scheme are needed. These look like the protected cells that can be created within a fund, where member entitlements are managed individually.

The Scheme Proprietor is the engine of innovation, creating a rules-based system to ensure that each protected cell within a CDC fund was treated fairly, looks a job for a distributive ledger (aka blockchain).

Should a Scheme Proprietor be able to operate with or without trustees? I see no difference to this and the trustee/scheme model and the IGC/GAA contract based model.

Decumulation only CDC.

We have to wait to chapter 9 of the consultation till we get to the novel idea that members might want to join a CDC or have a CDC pension defaulted upon them.

This is a case of the cart being placed before the horse as most savers – when asked what they expect from a workplace pension, describe a non-guaranteed annuity or CDC pension. Most employers when asked what they want to do for their staff , describe a workplace pension.

The Government is slowly coming to the conclusion that for all but a handful of employers, whole of life CDC is a non-starter. That does not mean to say that they don’t share the view of other staff, that a CDC pension is of considerable interest.

The idea of a decumulation only CDC scheme is a non starter for the consumer. For a simple reason, set out in the consultation (oara 209)

CDC schemes would not have access to either the Pensions Protection Fund (PPF) or the FSCS.

Unless the Government is thinking up a third lifeboat, I can’t see anyone wanting to join a scheme where there is no redress. If there is no employer in the equation and there is no insurer either, then the risk from being in a scheme will be considered too great.

Consequently, savers need to be in an FCA regulated fund, where FSCS does apply and there is oversite from a regulator which is held responsible. The Pension Regulator has no business with this kind of arrangement other than it might be an investment pathway or default from an occupational scheme (including a master trust).

The DWP has finally acknowledged that there might be an alternative way of doing things but are reluctant to accept defeat on the CDC decumulation only scheme

Both we and the FCA welcome engagement with organisations that have proposals for how a CDC type arrangement might operate in the contract-based space while we continue to develop our understanding of what a trust based decumulation only CDC arrangement looks like.

Once again, we need to have someone outside the regulatory box, to stop silly turf-wars, Laura Trott should make it clear- asap – that Decumulation only CDC is an FCA regulated fund not a TPR regulated Scheme.

The Consultation is at too early a stage for the DWP to have any fully formed view on decumulation only CDC and that is good. the DWP should decide to press on with whole of life CDC for smaller employers using the master trust and forthcoming supertrust regulatory models and adapting the CDC regulations and code.

It should hand over decumulation to the FCA right now and the FCA should set up its own working group to consult on what (if anything) needs to be done, to allow funds to provide a decumulation only CDC pension. I suspect that there will need to be some tidying up around wind-up rules to avoid falling foul of disputes over tontines. Otherwise, it has models in unit-linked and with-profit annuities that can be adapted to an non-insured environment.

I apologise to readers for going on a bit, this blog is too long and it does not begin to give the detail justice. Pricing of decumulation only CDCs and more thoughts on alignment of regulations will follow.

I’ll end as I began, this paper is a massive step forward from what came out in January. The DWP can move forward to deliver multi-employer CDC , it would be well-advised to hand decumulation CDC to the FCA.