This is a blog about CDC and if you are interested in the subject, I recommend you listen to it. Sam has a very similar career path to Nico  (through banks and consultancy) and while Sam’s still at LCP and advising on £13bn of assets, he sees CDC as an option for DC plans to take on. He is rather optimistic for CDC than the sceptics!

LCP’s Sam Cobley

There is an alarming return to the 70 minutes+ podcast but this is to accommodate an initial discussion of a week when Nico and Darren have been in and on the fringe of the Edinburgh pensions festival.

Is CDC good Value for Money?

The question that the discussion between Nico and Sam have (Darren claiming to be out of his depth) is whether we are seeing the formation of CDC schemes for the whole of people’s lives. I suspect that apart from the Church of England’s affiliated employee scheme (managed and advised on by LCP) , TPT’s and the emerging Pensions Mutual, there are but three schemes. I know of one other consultancy looking to launch an UMES whole of life CDC, but they have yet to show their hand.

For the most part, interest has been not in the transfer of contributions and assets into a whole of life CDC but the Retirement CDC for which we should have legislation by the end of the year and – following the previous pathways, the opportunity to launch a Retirement CDC some time in 2028 or 2029.

For Sam, the interest in CDC is as a choice for trustees and commercial providers and it is quite likely that CDC will be offered as the default for some (WTW made it clear that was the direction they were taking Lifesight, at the Edinburgh Pensions UK investment Conference.

LCP has a largish CDC consultancy team headed by Steve Taylor for whom CDC at all stages and Sam had to pick his way past potential in-house disputes, he being a DC man.

Sam has CFA and is not an actuary and he sees life slightly different from say Adrian Boulding. Sam is an investment man , Adrian an actuary. Sam likes DC, Adrian likes adequacy and Nico definitely prefers the certainty of DC even if that certainty is less than optamistic.

Here was the article Sam published in late January explaining that the (up to) 60% improvement in pensions from CDC depended what you compared CDC to .

If you invest in good advice and upgrade your DC plan (with a consultancy like LCP) you will narrow the 60% considerably. Hymans (who advised Nest to a flex and fix) and LCP who invented the phrase and concept of “flex and fix” are clear in their head that DC can do better than trail CDC by 37.5% (the other way round of looking at CDC doing better than 60%). Chris Bunford, who worked at LCP on Church of England’s putative UMES CDC has been clear that the amount that CDC provides better pension is something between 30-40% and the 75% the PPI claims.

So Sam was not going to retread his paper and explain, as my friend and actuary to Pension Mutual’s developing CDC scheme, explains it, that even if CDC got people a 20 or 30% pay rise for the rest of their lives, it would have done well.

Of course Sam is keen to point out that having a better pension is one thing, having the flexibility to draw your pot as you choose (as you can do till the flex is swapped for an annuity fix – say at Nest’s 85) another.

What price flexibility?

The choice will be I suspect between giving people relatively little pension and maximum flexibility and maximum pension from a CDC, but not much flexibility.

I had a good discussion with Janette Weir of Ignition House, which touches on the bulk of this podcast. Her point was that when you look at what is actually done right now, it backs up the view that CDC will be 60% better in providing lifetime income but only if people are after a pension. Sam makes the point that most people say they want an income , but when it’s explained that this does not mean flexibility, they aren’t so sure.

Here is the central question. Are we after adequacy, in which case we go down the CDC route, or are we after flexibility , in which case flexibility will always win.

My view (for what that’s worth) is that posh people who pay for advice will want flexibility , while ordinary people will find the simple pension of CDC more practical in helping them live their lives with greater comfort or at best “adequately“.

So we are likely to see the debate roll on. Who will promote CDC for the whole of life – well they are likely to be unions and employers who know what adequacy is (but haven’t the money to give it with flexibility) and at the other end will be consultants and employers who pay enough and contribute enough into DC that flexibility is more important than pensions.

Where does this leave Nest and those like them?

My suspicion is that the best of DC will be achieved by the best DC schemes, those advised by the quality of consultants, Nest was advised by Hymans but £13bn of DC money is advised by Sam and I would be surprised if much of that money is going to pass into whole of life CDC!

The CDC solution was not right for Nest because they could not slam the door on flexibility and many other commercial trust based workplace schemes will go the same way.

Which is why I suspect that CDC will work best for employers who are prepared to maximise pensions and leave it for staff to opt-out of CDC if they want flexibility (with fair transfer values we hope).

There will be a small number of UMES whole of life schemes to begin with and none at all if one trade body has its way. But I hope that Royal Mail, CoE , TPT , Pensions Mutual and others will create sufficient momentum that both Sam and Steven Taylor can have a future at LCP and that in a year, we can, as Darren suggests, look back at the gestation of CDC with positivity.

Sam Cobley ended

“we don’t know how many whole of life CDC’s are being formed”

I will end with a hope that Pensions Mutual see

“quite a few whole of life CDC’s emerging, and the first rumblings of retirement CDC this time next year”.