Here’s an idea, not my idea, but one worth consideration all the same. I’d tell you who’s idea it is , but it was given my under the Chatham House rule!

A big new idea!

Let’s suppose, that to encourage a more efficient use of corporate and personal saving through auto-enrolment, organisations that chose to invest into a CDC plan, became exempt from the impending increases in employer statutory contribution rates .

The increases are due to arrive some time in the middle of this decade, which now means sometime from 2025 onwards.

The general assumption is that on a money in / money out basis, a conventional DC plan will deliver better outcomes for money in a linear way.

It is also assumed that by using the CDC method, where money is invested over the whole of someone’s adult life and is not subject to “de-risking “and reinvestment in an annuity or a retail drawdown plan, the amount saved produces a +30% outcome. You get 30p more for every £1 saved. This 30% uplift is conservative,   WTW reckon the actual uplift over an annuity would be 70p per £1 saved.

So the current DC system is actually an inherently inefficient way of converting savings to pensions. People – according to the experts could not only get  30% more, for the same amount into CDC, but could get the same amount for 30% less. I actually believe this, which is why I have always been a fan of CDC. Put simply, it is better value for money than DC.

Many businesses, especially small businesses , dread higher taxes

If you are running a small business, struggling to just get by, the prospect of an increase in your and your staff’s pension contributions spells trouble. Not only does it take money from the businesses P/L but it forces up wage demands as staff find less in their pay.

If it were possible to promise staff the same pension outcomes without either you or they having to cut take home or reduce development cash, then I think this would be more than acceptable to staff and those funding the business.

It would also reduce the burden of auto-enrolment on the tax payer who picks up a substantial tab for loss of income tax, corporation tax and national insurance.

Making pensions more efficient means more for less in terms of overall spend and it means money invested can be invested more patiently, more productively and to the advantage of the economy.

So why not provide businesses with an incentive to switch to CDC?

If the Government is serious in its belief that CDC produces better outcomes, it should encourage employers to shift their workplace pensions from DC to CDC. The Government already incentivises higher savings rates through tax relief, why not encourage more efficient saving through lower contribution rates?

I appreciate that this idea is counter to everything that the pension industry has been banging on about for the past quarter of a century but there is method in its madness.

I suspect that when people cotton on to the fact that the Government is endorsing CDC in this way, they will start asking the people who run their employer’s pension scheme whether they might not be better off in one of these 30%+ schemes and why the employer isn’t getting them saving that way.

If people start asking those kind of questions, then the people running the £50bn DC schemes of tomorrow may start thinking that some of that £50bn should be run on CDC and not pure DC lines.

And while the firms that struggle to pay the minimum AE contributions (most employers) will find the adoption of CDC , the most viable way of continuing to pay workplace pensions, other employers will start competing for staff’s favour by promoting pensions on more than the contribution rate and the costs and charges. They might actually start talking about pensions rather than pots – because that’s what CDC gives them.

What is the alternative?

The alternative to doing something as radical as this (and this is not my idea) is to do nothing at all. This will result in

1. No CDC schemes being set up
2. A continuation of the inefficient DC system as we know it today
3. The hiking of contribution rates to the great distress of many employers

Pensions are things we should be proud of, they are an economic miracle that we’ve hidden in a cupboard and swapped for tax incentivised savings schemes that we now call workplace pensions – but aren’t.

CDC is not the poor man’s DB, it is the DB we started out with, DB established on a “what we can pay” basis (best endeavours if you like).  It is not guaranteed but what is? Death and Taxes are guaranteed, not future retirement income. But it’s a bloomin’ lot more certain that you’ll get a meaningful pension out of CDC than out of DC, which is the best promise we can afford to give ourselves and our staff in straightened circumstances.

Time to get real about CDC

The Royal Mail CDC model is designed to give equivalent outcomes to the Royal Mail DB plan which it replaces. There is no DB plan to replace for all but around 5000 of the 1m employers in Britain, the rest never had a DB plan in the first place.

CDC is not a dumbed down version of DB for most private sector workers, it is a way to get your and your employer’s pension saving working at least 30% harder.

Even if the amounts saved into CDC are pitifully small compared to what is needed to match the DB benefit, the DB benefit is not the benchmark for all but 0.05% of employers . Instead it is at least 30% enhancement for every pound saved.

When people start thinking in these terms , whether employers or savers (or both), then there will be a real incentive to pay in more.

Right now most employers see pensions as a tax not a benefit, CDC could change that if it was only given half a chance.