It is funny what captures the imagination of the pension brother (and to a degree sister) hood. The Pensions Bill has become an argument about mandation of investments and whether Government can have power to implement it to increase funding of pensions in Britain.
When it comes to the CDC UMES legislation , which went through in October, the argument is about the use of the “60%” figure here. This is from a DWP press release to launch a consultation on CDC just for retirement.
The DWP make it clear that the 60% increase in pensions from using CDC rather than DC
- Is for a whole of life approach (not a dump of a DC pot into a CDC fund to pay a pension at retirement)
- That it “could” be – but is not guaranteed
- That the improvement in returns from CDC could be “up to” 60%.
Actually 60% is not the highest estimate of increased pensions from CDC. This is from the PPI’s November exhaustive 84 page study (included below). Here is a claim of 75% increase
Figures in the Executive Summary
The headline figure of a 75% risk-adjusted improvement of collective drawdown over DC + full annuitisation given in the Executive Summary was computed using the PPI economic model and the optimised strategies. We explain the precise meaning of this figure in Chapter 4 in the section on “Risk-adjusted comparison of schemes” which summarises the main quantitative results of this report.
Other studies from actuarial consultancies have also concluded that more than 60% might come out of a CDC pension than a DC + full annuitisation. The Government, if pressed, could say that it has used an estimate somewhere in the middle.
But estimates of increase will never be enough.
This headline from the Daily Express is now 7 years old , and is based on DWP figures used by Amber Rudd (remember her?). Again the caveat is in the “could” and this version has an increase in retirement income of 7%.
More recently, MPs and Peers of the Realms were given details of the pros and cons of CDC in this document.
This document is downloadable here and is a useful explanation of both the advantages and disadvantages of having a CDC pension.
What it doesn’t do is dispute that the lifetime advantage of CDC as a pension or the numbers from actuarial consultancies and the PPI that suggest it is “up to 60%”.
Of course there are other things to bear in mind. By colleague Chris Bunford writes in a co-authored article with me that
As CDC enthusiasts and people who are committed to finding a way for pensioners to enjoy a substantial annual income in retirement without making complex investment decisions, we are delighted that the pensions industry seems unified on the CDC performance debate. Whether CDC schemes outperform standard DC by 20% or 60% is a matter of assumptions and perspective, but it’s generally agreed that
“Through pooling of longevity risk, and adopting a higher return-seeking investment strategy, CDC can offer a higher expected income for life than alternative approaches.” (John Southall L&G)
I don’t know what advantage I’ll get from CDC, it may not be 60% as I’m 64 and have been saving a pot since 1984, but if I was taking my pots in 42 years from now, I’d expect to get a lot more from CDC than from an annuity purchased by a DC pot! This is a whole life thing.
CDC is important because it gives all generations from mine to a kid coming into auto-enrolment in his or her early twenties, a chance of a decent pension. It’s what we’re in the business to deliver. There will be people who will want drawdown or total freedom from pensions and they can opt-out. But I reckon that 90% of us are defaulters into whatever is offered us as the best pension option – at least from our pension! Whatever the improvement in pension, CDC offers us hope that it will be decent in years to come.
Here is that PPI monster published last November
The one that lays it all out in analytical detail
