Holly’s is the most interesting of quotes. It is from David Brooks of Broadstone and starts in full
Commenting on the government’s move, Broadstone head of policy David Brooks said: “CDC is a divisive solution but while it may not be perfect, it could certainly prove to be good enough.
Intriguingly he goes on
“On one hand it satisfies the desire for a return to some degree of paternalism in pensions where people can, in return for their share of the cost, receive an income for life albeit without the gold plating of traditional defined benefit pensions. However, on the other, there are question marks over whether it can provide better outcomes than individual defined contribution pensions or whether it can resolve accusations of inter-generational fairness.
Here I would make two points. Firstly, if I had bet on either horse at Ascot last weekend that won at odds of 100-1 or more, I could argue that betting on such nags is a better way to get rich in retirement. I didn’t and not many people did. DC can be better than anything so long as you get the bets right but that is not how to manage pensions for most of us!
The second point is that pensions are intrinsically unfair in being a social insurance. If you earn a lot get paid the state pension for the first time in October and die in November you get a tiny fraction of all the national insurance you paid in your life . You get a lot more money from the state pension if you earned a pittance and lived to 105. What’s fair about that? No pension system is “fair” in the sense that there are no winners and no losers!
“While this idea may be too late for many employers it is hoped that enough will see this as a way, without open ended costs, of providing a more secure income for employees in their retirement.
In what sense “too late”. In 2000 , Derek Benstead of First Actuarial wrote a stakeholder submission arguing for CDC, 24 years later we may get adequate leisure. I prefer to get that legislation than in 2050. I don’t hear Derek or any that followed him moaning, I hope we will be cheering soon! I hear a lot of new commentators saying this kind of thing, like they would have made a difference if they’d been commentating back then.
“Despite the downsides of CDC, there are enough upsides to see this as a positive step forward with people able to receive a more secure income without having to make complex financial decisions at crucial pinch points in their life. The details of the regulations being laid will be key to whether this innovation can encourage enough employers to take the leap and participate.”
My feelings is that most employers will do what they are told by consultants and most consultants will prevaricate. I see very few people sticking their hands up and saying “I’m going to run one of these plans so long as I legally and profitably can”. I am one of them, I want to be part of a group of people who run a CDC scheme for employers who want better pensions for staff, I think there are a few of them.
Many existing workplace pensions will be more interested in compliance with the Pension Schemes Bill/Act. For them accumulation is working quite well , making the successful money while those failing are looking to sell out to get the aspirant to “Scale”. We have got a system that is working for saving but not for spending money.
Some people buy annuities with their pots, the majority buy level annuities that do for now but will fade in value as inflation eats into them. I hear that CDC will target increases in income which , like the state pension , means pensions will pay income in real pounds, pounds that increase to keep their buying power.
Broadly supportive
The shift from people choosing level annuities or pension freedom to getting a pension based on the best endeavours of a CDC scheme is immense. 60% increases in pay do not come along often. When the idea was first made to the ordinary person back in 2019, the Express ran this as the headline
Back then the Government (with Amber Rudd as DWP secretary) thought they could get away with a 7% increase in pensions (we never did get to how that number got quoted!) but the royal couple drunk Guinness to the news!
This time, CDC could be real and so long as the ABI and confederates do not derail it, we should have CDC schemes in 2027. When we get CDC as a means to get paid our pots we’ve built up in DC workplace pensions is another matter. The usual consultancy and legislative cycle could add another two years to that putting the Pension UK’s wish to be ready for 2030 in doubt let along Bell’s roadmap for defaults to be in place for decumulation in 2027.
We’ll find out a lot today!