I’m very pleased to see Hymans Robertson getting behind collective pensions in this way.
But I’d like them to go further and put money where their mouth is.
If CDC is going to happen, we are going to need people to do it and the market is crying out for a fiduciary manager to establish a CDC pension service for employers looking to offer semi- fined pensions for a defined contribution.
Hymans are calling for three things
Sadly, there is no promise from the consultancy to deliver a service if all this happens.
The report is in effect an endorsement of the whole of life CDC concept , demonstrating that solidarity across generations offers advantages over the decumulation only variety
As a concrete example, decumulation only CDC
schemes might have two or three times the sensitivity to
investment markets as whole of life CDC schemes. So for
any given market shock, the decumulation only members
will experience three times the impact on their pension
increases – both up and down – each year.
Herein the problem for all kinds of CDC. To get by with an investment driven approach, you need time and a duration of perhaps 30 rather than 15 years. But the funders of master trusts that look like being all that’s left of the DC market in 10 years time are not giving up the risk-free accumulation of the pot for back-end of the risk-sharing cow.
The cost of every new unit of pension promise will vary
across members, and over time. In the simplest case,
members share that cost uncertainty in exchange for a
clear and constant rate of benefit accrual. But that
simplicity can create winners and losers
So long as there are savers winning out of accumulation only DC, there will be plenty of sceptics arguing that those purchasing units of pension promise are behind the curve and “losers”.
For whole of life, it’s a more involved question. To avoid
value transfer (ie the creation of winners and losers), you
would need to adjust the pension for each pound of
contributions in line with a member’s age, longevity
trends, and market conditions. So members would earn
different amounts of pension for the same contribution
amount over time. It’s an open question as to whether we
can do that in a way that doesn’t disengage members.
Unless you are very brave (or have an even braver adviser) , you aren’t going to switch to CDC unless you have a lot of confidence in the investment management of the arrangement. This is why the fiduciary approach seems to make sense, but would any consultancy put its long-term reputation on the line over the delivery of a successful CDC strategy?
Add to the mutability in investment performance , similar changes in longevity and changes in people’s take up of CDC (as opposed to other options) and Hymans recognises that some CDC winners will get 50% more than CDC losers. This is the scale of the inter-generational challenge and I suspect that this risk will not be one that anyone is prepared to take on.
But they should…
People should join CDC schemes because even the losers do better than the people who simply save and spend on their own. The real losers are those who are forced into income drawdown from a DC savings career, probably de-risked at some point into some totally inappropriate pre-retirement strategy.
Hymans model DC v CDC in terms of likely outcomes, while the best DC outcomes exceed the worst CDC outcomes, this overlap is pretty small
Hymans claim that its modelling suggests CDC can deliver up to 50% higher secure income for life than a typical DC scheme. But not for all members.
But this doesn’t cut much ice with the average saver I say it again , the trouble with CDC is that it simply doesn’t please anyone enough and displeases those who want certainty too much.
The only way CDC is going to happen at scale is if it is mandated as the auto-enrolment mechanism that the large master trusts switch to, or if one fiduciary manager takes a big bet on building the model. The Royal Mail model exists , though no-one (including Hymans) considers it optimal.
It remains to be seen who will take up that challenge – if anyone.
