LCP tell us that after modelling two and a half thousand scenarios they have found that pound for pound, CDC delivers up to 50% more than standard DC when used on a “whole of life” basis.
The finding is an indictment on the current system of providing workplace pensions. We are spending £70bn a year incentivising a way of paying people in retirement that could be 50% more efficient. Even the worst of our utilities would blanche at providing a delivery mechanism that poor. Look to the pipes!
We have known that CDC can produce radically better outcomes for decades, Derek Benstead explained how in his Stakeholder Pension submission in the last century. GAD dismissed CDC a few years later and the idea lay dormant as various DC panaceas were tried. Stakeholder Pensions gave way to workplace pensions, charge caps came and partially went. There has been a lot of noise around investment pathways , default decumulators but in practice CDC has not happened.
Now the large actuarial consultancies are lining up to promote it and I expect that a new Labour Government will give CDC a puff in the Kings Speech. But fundamental questions remain unanswered (see title)
I’m a fan of the CDC concept but a word of caution, nobody can join a CDC scheme without first becoming an employee of Royal Mail and even then , you will only be looking at a whole of life CDC plan if you’ve worked for the company for a year and work there all your life.
The whole of life model is one that few people starting their first job would expect. Though those few do include most postal workers who – once they’ve done a year – tend to stick at it. CDC works for Royal Mail and for a few other job for life occupations (Church of England vicars). What are these people doing in a DC plan? Why are such people not in a DB plan? Can the huge amount of fees racked up to launch the RMCP be justified as VFM?
The question is only worth answering if we are prepared to accept
- That DC is irreversibly flawed?
- That DB has been damaged beyond repair
- That ordinary people are going to be sufficiently impressed by CDC schemes to make them wanted.
I am not convinced that DC’s flaws cannot be pinned , that DB cannot be returned to guarantee retirement income and that anyone outside the magic circle of senior pension actuaries believe that those 50% better pensions are going to become a part of day to day retirement.
As mentioned at this week’s Pension PlayPen , the question we should be asking is what value we put on guarantees. The two principle rivals to CDC are annuities and DB scheme pensions, both of which are guaranteed and give up much of their potential upside to deliver to an exact expectation.
If we are to have unguaranteed pensions , then the public are going to have to be convinced that what they are getting isn’t just drawdown without the freedoms.
So far, the arguments around CDC have been top down. They have come from actuaries arguing whether CDC is 70%, 50% or 40% better than DC or DB.
When Scottish Widows asked 1500 of their workplace savers what they were expecting from their workplace savings , 80% of them said they wanted a consistent income that paid for life – whether they’d be happy to accept that the consistency would be subject to market forces wasn’t asked but that conversation is not being had.
As Calum Cooper wisely said at yesterday’s Pension PlayPen meeting, we have lost sight of what we are trying to do with pensions to the point that there is no common purpose. I see no reason why any employer would want to spend the millions in fees to set up a CDC scheme of their own if there were no business case. There is zero recognition that CDC is 50% better by staff and therefore it is not seen as a cost effective upgrade in DC.
Likewise there is such as strong lobby among those who oversee DB pensions that the guarantees are integral to the value of the pension, that there is no way that DB benefits can be re-established on a CDC basis. This despite all the reports from actuaries that CDC produces considerably better outcomes than DB (30% better according to WTW).
CDC has no target. There is no focus on by whom, no focus on through whom and no proper understanding of to whom. It is currently an actuarial and legal concept on which millions of words and pounds has been spent to negligible effect.
CDC is good , it works and it should be implicit in many DC plans as a means to turn pots to pensions. It isn’t and it won’t be until people start properly focussing on the purpose of what we are doing with our retirement savings.