“We have built it – why don’t you come?”

This is the question I’d be asking , if I worked at the DWP. In a recent Laing Cat cast, Tom McPhail describes his trips to Caxton House where the first question he gets asked by DWP officials is “how do we get people to do CDC?”. It’s sad but true that there is no evidence that any employer other than Royal Mail has come to the DWP and asked for permissions to run one.

This may be because there is a £78,000 application fee and that’s just for the right to get the Pensions Regulator to tell you where you are going wrong. The cost of entry are due to fall shortly , when the legislation is in place for employers to club together and get someone to organise a multi-employer CDC scheme. The Pensions Trust have made noises about doing this for groups of social housing employers and others with an interest in running a pension scheme along CDC lines.

There are two dependencies, the first of which is that the legislation for multi-employers arrives and the second is that all the hard work is appreciated sufficiently by staff to make the effort worthwhile for bosses. TPT are exploring the depth of that appetite.

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CDC under Chatham House rules

The RSA CDC group met at Hymans Robertson’s offices on Friday to discuss the promotion of CDC to the general public and to employers. I can’t say who  said what as I am bound by the Chatham House rule. Even under the Chatham House rule, no-one was particularly keen to say anything that anyone else could disagree with.

Much of the meeting was spent discussing how CDC schemes should be responsible and make sure that those signing on the dotted line had taken note of at least 6 key risks of doing so.

You know the kind of things –

“CDC income can go down, the scheme could fold, you could die before getting VFM , everything depends on the markets, there’s no PPF to bail you out”

When I joined the occupational scheme from which I now get a pension , I was told

“fill your boots”

I guess you fill your boots when someone else is taking the risk, shared risk schemes are apparently different.

Considerable agonising followed over the possibility that a price war between CDC schemes might brake out, each promoting ever more extravagant pension promises based on ever more unrealistic investment assumptions and pessimistic mortality assumptions.

The collective worry was that people would choose a CDC scheme based on marketing and not on the fundamentals of the scheme.

Infact, at no point in the two hours of the meeting did I get the sense that anyone saw much of an opportunity for anyone – that wasn’t tinged with considerable risk. It was a case of every sky lined with clouds. The conviction quotient was pretty low.

I would suggest that CDC has allowed itself to be born in a quiet graveyard. I have been promoting the advantage of backing pensions with growth assets and without guarantees for 15 years (as evidenced on this blog) and I have yet to see one person getting one.

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CDC needs a business case

The fact is that in the great GANT chart in the sky, CDC is stuck. It is now owned by actuaries and lawyers and not by the commercial entities that could give it currency. What master trusts that were at the CDC meeting on Friday made it clear that CDC was way down their development lists. The commercial superfunds are showing no interest in providing market based pensions, they would rather provide capital backed guaranteed pensions that trade rate for certainty.

Breaking the link with to a sponsor is proving much harder than people expected. I suspect this is because there is very little confidence in market returns. I have seen the optimism that underpinned “with-profits” and the ascendancy of best estimate DB pension funding, turn to a deep-rooted pessimism around the equity premium , the liquidity premium , any kind of premium to the risk-free rate. In short pension strategists have lost confidence in long-term investing and are enslaved to mark to market economics.

This is not a universally held view. Risk has been embraced within the private markets by private equity and hedge fund managers who have taken advantage of our risk aversion to harvest the opportunities created by entrepreneurs.

CDC is currently stuck. It is in the hands of the risk-averse pension fraternity , while the entrepreneurs are busy managing wealth elsewhere. CDC would like to take advantage of the long-term growth they see being achieved- indeed , its success is based on it embracing it. But no-one can quite have the courage of the conviction that long-term assets will deliver what is needed for CDC pensions to deliver.

The idealism of the mutual endeavour that is the RSA’s vision for CDC is admirable, but it has within it , the seeds of its own demise. If we seek to have no failures, we have no wins, The alternative is the capitalist system where big money sits behind the development of pensions and demands an internal rate of return based on it taking the big risk,

CDC wants to share all risks but it is taking no risks. The sum of risks shared in a riskless CDC system is zero, which is precisely the number of CDC schemes we have in the UK today.