A lot of C’s in the headline!

Yesterday’s meeting of minds over the take up of CDC threw out an assertion made by the Government that CDC was up to 60% better than a DC pension alternative. This is a claim made by Government and uses calculations used by actuarial consultancies which need to be challenged. This challenge came yesterday from LCP.

The actuarial thinking I am using as I and several colleagues set out our proposal for CDC comes from LCP thinking, most notably Chris Bunford and we agree with Sam that the increase in pension from moving from DC to CDC is not 60%, if the DC you are moving from is the most modern CDC that the likes of the best master trusts are delivering.

I would expect Sam Cobley, who is a power behind LCP’s work as investment consultants to the best DC schemes to defend his work and he does.

I have many other actuarial friends who make the same point. In our modelling of the improvement that CDC can get in accumulation and decumulation over the best DC can do, we get an improvement of 30%. My actuarial friend in Brighton, Andrew Young has quietly pointed out that on a like for like basis, the improvement from CDC is more like the 30% figure. Actually Sam and his team reckons that CDC would give a 20% pay-rise over DC flex and fix strategies being modelled

However, on this basis, we calculate CDC strategies are expected to outperform the median income drawdown strategies by 15-25%. The range isn’t a ‘margin for error’, more a reflection of the fact there are many different income drawdown strategies that we modelled. 15-25% is a less headline-grabbing number but, to state the obvious; c20% still reflects a very material increase in total post-retirement wealth.

This is not to say that you won’t do 60% or more better in CDC by drawing down your DC pot badly. The reality is that most people (according to FCA studies) are drawing down their DC pots very badly indeed having their pots cashed out and having the money sat in cash accounts while the “spend horizon” stretches 30 or 40 years from the 55th birthday.

It was LCP who issued the idea of “flex and fix” as the first guided retirement default that emerged. That was a few years back – before the Pension Schemes Bill made it mandatory for DC schemes to offer a means to offer retirement income and longevity protection.

If I see an alternative to CDC being thrown up by DC – it is “flex and fix” which is what Paul Todd announced for Nest and what is an awful lot better for most people than cashing out or annuitizing at the earliest point

The harsh reality  is that  “cash-out” is the lamentable benchmark for a very high proportion of savers who have done, are doing and will continue to take their pot as cash because there is no alternative within their grasp.

CDC is a default and it will be a default way to decumulate- get paid a pension – from DC schemes when Retirement CDC arrives (probably in the back end of 2028). If we are to follow Sam Cobley’s thinking, that will be when a meaningful choice will be available for DC schemes that have not switched to CDC and I suspect that many will stay with flex and fix- if advised by Sam or consultants of his calibre.

The bulk of Sam’s paper is an explanation of the improvements in firstly accumulation strategies between DC and CDC

There are marginal improvements that can be made through collective pensions but swapping cash liquidity for bonds on 5% of the fund is not going to make a major difference to the amount of pension.

Similarly, in decumulation, LCP models (presumably for the flex in flex and fix) don’t look much like the 40/60 strategies used in the models that are being used to promote CDC

Sam’s point is that a top investment consultant can drive an extra half a percent as a premia to cash from DC decumulation strategies.

Who is Sam addressing?

I think Sam’s audience is a pensions expert who assumes the mechanics of a well run DC deliver high quality DC schemes. I am sure that LCP have confidence that they, like other top DC consultancies are referencing CDC to the DC they are running. Indeed he sees a best of all possibilities as a combination of DC followed by CDC at retirement

Here his argument is correct. A few employers who are going to offer “flexibility” for members of DC schemes rather than a CDC pension over the whole saving and spending life.  CDC offers  very little flexibility other than to opt-out and I can see flexibility being “the best of both worlds”.

That is why a high proportion of DC schemes will stay DC schemes and many will move to CDC only at retirement. But my argument is based on the FCA study of how the nation as a whole is behaving.

I have little I can argue with Sam about – with regards numbers.  But I have a lot to push back on , with regards how we use the flexibility we are given.

CDC is not going to win just on investment grounds, but it will pay people an income in later life to the non-advised as nothing else.

The reality is that people given the flexibility of the pension pot can do very well if they can afford to have an adviser but do very badly if they are left to their own devices.

CDC as an alternative to pension pots is very sensible; it offers you a way of buying pension which is what most people think they’re doing when they save into a pension.

I wish that Sam had made his argument at our discussion. If you want to follow what was said the video is here