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.