Let’s not forget just what a chance CDC is to fund managers in the UK. At a time when DB schemes are hunkering down into end-games and DC schemes are consolidating into a few schemes which still are primarily focussing on cost and passive exposure to assets that they can afford within the AMC agreements between them and their clients, CDC is rather more of an opportunity.
Here is an excellent article from Holly Roach of Professional Pensions.
Most of the pension provided by a collective defined contribution (CDC) scheme is expected to be driven by investment strategy, according to LCP.
Modelling by the consultancy revealed it is expected around 70% of CDC provision will come from investment strategy, with 30% coming from contributions.
As such, the firm warned investment strategy “should be considered sooner, rather than later”.
LCP said investment strategy “impacts everything” for a CDC scheme, noting small differences in returns “magnify over time“. It also urged the sector to consider reputation, resource and cost – whether a provider or an individual scheme launching a CDC structure – as the trio are “all impacted by investment strategy“.
The firm added CDC can “offer better outcomes” compared to defined benefit and defined contribution because “it can invest in growth assets for much longer” and can “sustain growth exposure“.
LCP said CDC is “structurally better able” to remain invested in growth assets because it pools longevity risk across members, shares investment and sequencing risk collectively, and avoids the need for individuals to self-insure through early de-risking.
Source: LCP
LCP added inflation linkage will be “key” to CDC and warned the interaction of investments and pension promises will “impact generational fairness“.
Partner Mary Spencer said:
“Our analysis shows just how important getting the investment strategy right is for a CDC scheme. Well-designed investment strategies will be central to determining which CDC schemes deliver the best outcomes for their members.”
Principal Andrew Linz added:
“CDC’s ability to remain invested in growth assets is a key driver of strong expected outcomes, but this is not automatic. Outcomes will depend on the quality of investment strategy design; how risks are managed and communicated; and how liquidity is managed over time.”
Some thinking about investment of a CDC investment fund
I have been using a very similar chart for several years, invented by the doyen of CDC design, Derek Benstead
The opportunity to excel exists for asset managers within CDC in a way that it doesn’t elsewhere in UK pensions.
This means that any proprietor of a CDC scheme must put investment at the top of its priority list when designing its UMES multi-employer CDC scheme.
So far we have not heard much from the asset managers and a lot from administrators, actuaries and lawyers. If I was in the strategic part of an asset management looking for growth in UK pension investments, I would be getting very excited about CDC.
Thanks to LCP and Professional Pensions for explaining where that “up to 60% better pensions” that the Government quotes- comes from. It’s getting a lot of employers quite excited and I’m quite excited too!
Footnote; here is the DWP’s announcement last October
My own (Shared Ambition DB) scheme’s experience appears to indicate that LCP have underestimated the investment strategy’s contribution to outcomes.
Our own investment strategy is targeted to make us. a fully open scheme, entirely self-sufficient for the foreseeable future without reliance on any future contributions. The fact that contributions are likely to continue at some level only increases our capacity to enhance members benefits in the same way as CDC should.
The Stagecoach/Aberdeen deal appears to suggest the same may apply to a largely closed DB scheme.
Yes I think asset managers should be considering their strategies – but not just in relation to CDC.
How is it envisaged that CDC could benefit the employed-by-self section of the UK population?
Approximately 13.5% of the UK workforce is self-employed, either as a sole trader, a director of a personal company or a partner in a business.
This proportion represents roughly 4.38 million workers. They grew steadily from 2000 to a peak of 15.3% in 2019, and fell significantly following the COVID-19 pandemic and have yet to recover to pre-pandemic highs. With the advantages of AI and a focus on replacing the lock-step career path of the 1940’s I can envisage this group expanding.
I am sure they would appreciate 60% more