These people will get CDC pensions not a fund value at retirement

On the 10th December, when I was flat out in the neurological ward of Kings College Hospital, a report on the opportunity from CDC was delivered by Hymans Robertson.

I have this week received an invite to meet with Paul Waters (head of DC) and James Mullins and only now have caught up on this.

This is an interesting introduction as the emphasis is on “certain incomes” and improve the standards of living of young and old (without hurting either).

We should not forget that right now we are moving from a generation who expected a defined benefit – a certain income based on a formula, to a pot of money to be spent as the saver chooses. You could call this an intergenerational transfer of risk and certainty, most people think it unlikely that the young will do better than they would have done if in a pension based DB plan, most will think that even basic Auto-enrolled DC is better than nothing. Many people of my age (63) have spent most of their working time saving or accruing nothing.

We offer people choice with what they’ve got. They can exchange the promise of DB by much greater choice by transferring to a DC pot and get more choice, but there is another voice – here expressed by the PLSA – suggesting that most people don’t want choice but a pension that meets expectations.

This is a “roundtable report” and gives us views from Hymans and

Andrew Dobbie, Unison
Paul Eagles, TPT
Ruari Grant, PLSA
Esther Hawley, Standard Life
Richard Hubbard, Church of England, Capital Cranfield
Jack Jones, TUC

These are experienced and perceptive people and they have mapped out how they think CDC will spread in the next 10 years

But for this to work we need a commercial model that makes sense from the industry perspective.

Here we see a different mentality at play than occurred at Royal Mail. The target is the “median fund value at retirement” and the cost of the service is met by the member “fees assumed”. This looks like a simplified DC scheme with rather higher fees of between 75 bps and 55 bps depending on achieved scale. Standard Life see CDC as a means to get scale into DC

This is indeed the industry perspective though I suspect that most people aspiring to a decent pension will be rather more interested in earlier claims that a CDC can deliver better incomes after retirement has been taken or partially taken

Disappointingly, the report says very little about pensions payable from the fund value at retirement. We have an observation that little  benefit from longevity pooling is achieved above 1000 lives but we see little about the pensions that will be paid from these pots.

In short, the wishes of those approaching retirement, that they have a certain income which pays more than they can currently get from an annuity and with greater certainty than comes from drawdown are ignored.

They are the tough decisions for the pensions industry. People are looking for an arrangement where they have a much greater understanding of the outcome of saving than is detailed here.

So when I get to meet Paul Waters and James Mullins I will be looking to hear about targeted income for people entering at certain ages , switching to pensioners at certain ages and contributing different amounts. The Royal Mail scheme does this, albeit not on a guaranteed basis. The post people I speak to understand that and put their trust in their pension and those who run it.

We are some way from being prepared to stand up and sponsor the promises with the intent that has been shown at Royal Mail. We may need to better understand the commercials and share transparently who will be making what and how.