I’m off to the Institute and Faculty of Actuaries this morning with certain friends to find out about the state of play for CDC in the UK.
As readers know, I am a long-time fan of the aims of CDC (turning pots to pension) but have recently become disillusioned with the way CDC has been captured by actuaries and lawyers and taken away from the people it should be serving (the posties for starters).
The problem with CDC is that it neither delivers the personal freedom of DC or the guarantees of DB but something indeterminate. Which makes it fertile ground for lawyers and actuaries and a dilemma for the public to pin down – it’s neither fish or fowl.
If you left it to ordinary people to decide , I suspect most of us would weight up risk v reward as we have done in the past. We stopped buying full cost endowments because to guarantee paying off you mortgage was too expensive , we preferred a promise from an insurer that the job would be done so long as they could make 9% pa on your money (a rate that sticks in my head). The conditional promise turned out to work most of the time , but when it didn’t , the whole endowment mortgage thing went pear-shaped in a couple of years.
Everyone has a plan until they are punched in the face
Here is the thing about CDC. Governments get punced in the face when financial services they endorse with legislation and regulation – go wrong. Not just politicians, but civil servants . Consequently legislation and regulation focusses on things going wrong not going right and we end up with over-regulation. So far we have seen little sign of CDC but a lot of legislation and regulation.
I spoke to one of the trustees of the Church of England DB plan, a scheme that is waiting to be replaced by CDC. I asked what was holding the Church back, the answer was the lack of regulation. We need more regulation to allow complex schemes like the Church of England’s to deliver CDC in a multi-employer way. We need yet more regulation to allow individuals to join CDC schemes to turn their pots to pensions.
The DWP want a plan to make it less painful when it gets punched in the face. It is finding no one wants to get into the ring with them.
We need a commercial model for CDC
It is very unfashionable to talk of making money out of CDC. I suspect this is because CDC has been incubated for 10 years within the Royal Society of the Arts as a kind of social construct in the spirit of the Blairite miasma. The unpleasant smell of commercialism has been kept at arms length and so have those who might deliver CDC, given a commercial opportunity.
So long as CDC is considered a not for profit project, it will not attract the capital needed to get it over the line. I suspect we are many years away from the first commercial CDC scheme and will have to rely on special cases for the delivery of the not-for-profit model, of which Royal Mail will be the first.
It is of course important that the Royal Mail CDC plan is delivered and for that to happen there needs to be a Royal Mail in place , capable of sponsoring it. I take my hat off to that organisation for continuing to fight for the right to offer non guaranteed pensions to their staff and delight in the prospect of the scheme arriving later in the year.
What can CDC deliver?
Back in 2017, when Guy Opperman and the DWP first endorsed CDC, it seemed an oven-baked solution to the problems of DC and DB pensions.
Right now CDC is neither fish nor fowl , it isn’t. It is not extant , it is simply a legislative and regulatory construct with pensions waiting to happen.
Will it become commercially viable? That is what I am going to the IFOA to find out. Is it a not for profits curiosity? I hope not. I do not think we will see it delivering better retirements for millions of savers unless it gets the support of commercial organisations capable of delivering it at scale.
I remain a fan and await a plan.
9% to make CDC work?
According to the Pensions and Lifetime Savings Association (PLSA), the average annual return for UK pension funds over the past 25 years (1995-2020) is around 6.5% to 7%. However, it’s essential to note that this figure is an average and actual returns can vary significantly depending on the specific fund, asset allocation, and market conditions.
Here’s a breakdown of the average annual returns for UK pension funds over the past 25 years:
1995-2000: 8.5% to 10%
2000-2005: 5.5% to 6.5%
2005-2010: 4.5% to 5.5%
2010-2015: 6.5% to 7.5%
2015-2020: 4.5% to 5.5%
What more do you need to understand the sceptics?
John, You don’t need 9% to make CDC work, CDC will provide the promised outcome provided the actual investment return matches or exceeds that in coverage funding assumption. CDC would work with a 1% investment return. Why should a collective arrangement expect to achieve a lower return than an individual arrangement with all its cost penalties, management responsibilities placed on the individual, and no sharing of risks?
Thank you, The comments on endowment mortgages I misread.
However, that old chestnut would be worth revisiting.
The illustrations of low cost endowments gave a total budget to repay the debt however when interest rates receded the savings on interests should have been reallocated to the accumulation of capital in the endowment or into overpayment of the mortgage above interest costs but instead it was pocketed by the borrower.
When the endowment failed to perform in a lower return environment it was labeled miselling.
For those advisers who serviced clients and who had a philosophy which championed the repayment of mortgages on schedule or better did not face the accusations.
The IFA community has no trade body to defend or fact check so a soft target and an endangered species.
One of the early criticisms of CDC (or CMP as it was called then) was that the Dutch similar system having to react to reduced investment returns had to reduce (albeit very modestly) pensions in payment. Perhaps the more recent Dutch experience should be given equal weight https://www.europeanpensions.net/ep/Dutch-pension-fund-PGB-returns-11-7-in-2023.php
I am aware of a number of employers who would like to follow the Church of England into a whole life multi-employer CDC scheme and would prefer a mutual to a commercial offering.
As you say, Henry, “legislation and regulation focusses on things going wrong not going right and we end up with over-regulation.” It is ultimately the individuals who suffer.
Advisers who focused on helping clients repay their mortgages on schedule or better, rather than relying 100% on endowment policies, were less likely to be accused of mis-selling. This highlights the importance of a long-term, client-centric approach to financial planning, rather than relying on commission-driven sales tactics. Equitable didn’t pay commission, just salaries linked to production.
In hindsight, it’s clear that the endowment mortgage “scandal” was a complex issue with multiple factors at play. While some advisers and insurance companies did engage in unethical behavior, others may have been misled by flawed analysis and assumptions. Perspective provides a valuable nuance to the story and serves as a reminder of the importance of transparency, integrity, and long-term thinking in the financial industry.
The scandal was exacerbated by the lack of transparency and the failure of regulators to adequately monitor the industry. The Financial Services Authority (FSA) was criticized for its lack of oversight and its failure to take action against errant companies and individuals. What a pity that regulation takes such an adversarial position instead of developing solutions in cooperation with front line advisers rather that the back room guidance critics.
The “scandal” led to a major overhaul of the financial regulatory system in the UK, including the creation of the Financial Conduct Authority (FCA) in 2013.
The endowment mortgage scandal is considered one of the most significant financial scandals in UK history, and it led to significant changes in the way financial products are regulated and sold to consumers.
Let’s hope CDC does not make the same mistakes.
Terry Pullinger, former deputy Gen Sec of CWU, gave an inspirational speech to the meeting this morning. A great pity it wasn’t videoed to post on Youtube.
CDC, flexible DB or fully DB, it is the job of the pension industry to provide pensions for ordinary people. In my opinion, closing schemes, consolidating and winding up doesn’t cut it. Open schemes are what we need, that’s the key criterion of success.
If, despite everything, we have an open scheme providing pensions to past, current and future generations of workers, then we are doing it right.
What we need is a national CDC scheme top up to basic state pension.
I was impressed by the returns Edi mentioned yesterday at 11.7% over 24 years. Twice the average returns over the same period. Is this not the holy grail with a return in excess of inflation that we seek? Was this achieved with liquidity as well?
I would love to understand the mechanism. I am coming to Wimbledon to watch the tennis on Tuesday 9th July I will come a few days earlier if it is possible to meet to discuss.