Martin Richmond has produced an excellent account of Hymans Robertson’s exhortation for us to take Collective Defined Contributions seriously. Here is the link to Martin’s report and here is the link to the event itself.

Hymans has gone to some effort to make their presentation available and I hope it is available to you all.

Here is the summary of where CDC works,

Here is what we are likely to get by way of versions

This is why (we are told) it will take 2 years (at least) to deliver the regulatory framework to allow people to save collectively.

78% of members would swap pension freedoms for a steady income in retirement. This was taken from a survey of 1,000 people who Hymans asked “what do you want?”. This is in line with my view that one in five people want to take control of their lives. Those who give up flexibility say they want to see a 10-20% increase in income to give up flexibility.

It might be worth you considering which of these options is most important for you

Here are the answers of those on the call

The interesting thing is that less than 20%  are thinking about income in retirement from DC. There is no pension from DC- only a right to buy an annuity which is not a pension but an insured income (which loses out on pension’s collective investment power).

I would 100% agree with these being the advantages of CDC over DC but I wonder if a CDC scheme that emulates a DB scheme to the extent of Royal Mail’s , actually is replicable in a DC world where people now consider that their money “purchases” rights. What I have been thinking of, is what Hymans has been thinking of, people should be entitled to pension based on what they pay and when they pay it. This has a new name “age related accrual” though I suspect we will need to find a better name going forward as it isn’t catchy.

Again , think of the questions arising

My worry about this kind of question is that it requires a lot of thought at the regulators. With the best will in the world, all of these “member protections” and “governance worries” are simply standing in the way of people getting better pensions. “Sign up and get going now” is what employers seem to want to do, according to Andy O’Regan of TPT.

The way to cut through the concerns about governance and inter-generational concerns comes from people purchasing future pension on a Value for Money basis (age related accrual).

So what is Value for Money age based accrual?  Unfortunately there’s lots of mention of “age based accrual” but nothing on what means everyone gets value for money

To me, what needs to be achieved is a publicly available price list where people can see how much pension they’d be buying based on the age they are. So you get more pension the younger you are – but you lose the money for longer.

If you are doing this price list properly, people can see your purchase power whether you are 20 , 30 right up to 70. You can see that what is on offer is fair  relative to other schemes and from that comparison you can work out if you are being is value for money.

The problem with this promise in the future is that it’s not a guarantee. If you find out you are buying higher and lower than the rate offered by other CDC schemes – how do you know if it’s a good rate? After all a low cost of purchasing pension, it might not be anything more than a marketing trick, if it’s a high cost of purchasing, the scheme might not get any support. Should everyone have the same money purchase rate? If everyone does that then are we creating a market regulated to death. We might as well have one national CDC scheme managed by the Government.

This is what my grizzly friend in Brighton wants. TPT’s presentation from Andy O’Regan calls into question how much discretion there is with the scheme actuary. The answer right now is that actuaries get quite a lot of discretion about all kinds of things including the increases paid on people’s pensions. My guess is that the capacity of schemes to do there own thing will fall under the Pension Regulator’s beady eye.

Herein comes the problem for CDC. DB schemes can operate today using this “age based accrual” and they are already regulated to provide a defined benefit. The problem for commercial providers of CDC (and we’d guess TPT would like to be one) is that they have to wait for the Regulator to catch up and then operate within a VFM driven market.

I don’t think it’s impossible, but I fear that the timescales being discussed on this session are going to be hard to meet. Getting a new version of CDC on a commercial basis will take a long time and a lot of regulatory deliberation. In the meantime people want something better than they are getting from DC.

A capital backed standalone DB scheme using VFM based money purchase pensions may be an alternative way forward. I can at least understand price lists and recognise the secured pensions I am buying.