CDC needs a business plan

I spent 90 minutes on a call with the RSA CDC Forum as a guest. I am a member of the RSA and a “Friend of CDC” but am not on the Forum because there is no business case for AgeWage to pay the associated fees.

I have heard many arguments for why CDC makes sense at the policy level, at the employer level and at the member level but I have yet to see a business plan which shows that CDC could pay a funder to set it up.

So let’s start from the beginning. For an organisation to fund a CDC – they must do so either out of philanthropy and operate on a not-for- profit basis , or to make money for the owners of the business that sets it up (for profit).

As we all know, “profit-extraction” in a DC pension world is made from an AMC and/or fixed fees from the fund. In CDC (as with annuities) there is further opportunity for profit from a cut on the distribution made by the fund. A CDC could aim to distribute 98% of the available return and keep 2% back as margin and to cover overhead.

Running a CDC without the constraints put on a DB scheme (such as a superfund) or the competition of DC schemes (where the AMC is in a race to the bottom) , should look attractive to deep pocketed financial services companies willing to wait till scale arrives but confident that when it does, there are annual revenues to be had in perpetuity.

This model should be particularly attractive to organisations that have the infrastructure in place to administer and pay pensions , to manage funds and to provide a good member experience. We have seen one example emerge of a “not for profit” CDC – the pending Royal Mail Corporate Pension Plan. We hear of master trusts willing to convert part of their DB or DC section to CDC, but we have yet to see colours nailed to the mast.

We have yet to see a potential CDC provider offer a straw man to the market which was bold enough to say “we can provide a sustainable service to the public which turns contributions into pensions at least 10% more efficiently than either DB or DC”. For any business case has to first establish the minimum viable product.

CDC badly needs a business plan that sufficiently excites those who have capital to commit it. Why has no such plan emerged?

I can give you three reasons

  1. CDC is currently stuck in a policy bubble , constantly proving itself to politicians and civil servants as a good thing.
  2. Despite agreeing that CDC aligns with its policy aims, the politicians and civil servants have not come up with a framework which enables a minimum viable product to exist.
  3. There is insufficient organised pressure from consumers and their representatives for urgent change.

The conversation at the RSA yesterday was about the investment challenge for CDC and into the meeting came not just me but a number of fund managers , keen to understand their opportunity. What I fear they heard was a conversation between lawyers and actuaries on the advisability of admitting illiquids into the CDC investment framework. This was interesting from a policy perspective but left me confused as to why I would want to participate in developing product.

I had hoped we might have had a case study from Royal Mail for instance. That was not to be. I fear we know less about Royal Mail’s CDC scheme today than ever.

I had hoped that we would have heard pitches from asset managers whose products they deemed suitable to provide wages for life for ordinary savers looking for greater certainty than they get from drawdown and better pensions than they get from annuities. This didn’t happen either.

Instead we discussed the potential cash calls on CDC schemes that might prevent them from investing in illiquid productive finance. This showed an alarming lack of understanding from some speakers about how CDC is supposed to work. If you start out with the assumption that once your initial membership dies, you have to wind up the scheme, you come to the conclusion that your scheme has a fixed duration. There were people in the room talking of limited duration CDC schemes, especially “decumulation only” schemes.

Let’s be clear, people are not going to stop saving, stop retiring and stop dying. So long as the need is there to convert pot to pension in return for a wage for life, then CDC remains open and has no cessation. As one participant wisely advise us, that does not mean some CDC schemes won’t close or that some employers won’t switch CDC schemes , but there are methods of continuing existing asset strategies through in specie transfer that mean that so long as people want pensions, there will be a demand for CDC.

Whether CDC exists to provide Government with PFI 2.0 is another matter. CDC is not about 100% allocation to long term assets, it is about paying pensions and many decumulation pension schemes may be cash flow negative from time to time.If your starting point is to distribute all available capital and not operate a buffer, then necessarily there may be some years when you pay more in pensions than you receive in new funds. It is therefore clear that investment strategies must be cashflow driven as well. This conversation didn’t happen yesterday.

Here is my problem, so long as CDC is being argued about as a means to please politicians, commercial organisations are going to see it as a honeytrap best avoided. The sooner concepts such as “for profit” and “shareholder value” start entering the conversation the better. The public will be ill-served if “profit-extraction” is the reason for CDC to exist, but it will be equally ill-served if we continue to have no CDC schemes. Right now, the prospects of having a CDC scheme ready to discuss look dimmer than at any time in the last five years. It is time we got a minimum viable product for CDC that isn’t called Royal Mail and high time someone set out the business plan for it.



About henry tapper

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