One of the discussions over Easter about my posts on CDC complained that I only made claims for CDC if a CDC pension scheme was “open”. I referred to the possibility of a CDC scheme entering an endgame and what that would mean for those relying on the promised pension. I posted a picture explaining that it would be bad news for people in the future and I stand by this, here is the picture from my friend Derek Benstead.

A collective scheme (whether DB or CDC) depends to deliver in future to be open. That means open to contributions from employers (it being a workplace pension at present). It will doubtless be the back end of the DC horse and this will be called Retirement CDC and there if will equally be responsible for new money that comes from employers – paid by them and by employees under auto-enrolment.

Can we rely on CDC schemes staying open? Well there are dependencies. CDC is dependent on employers and on conversion of DC schemes. It is dependent on the plug not being pulled on it by future legislation and most of all, it depends on the competence of those who manage the CDC scheme finances (the proprietor) and manage the scheme (the trustees and their executive). This is why we have a Pensions Regulator scrutinising both.

There are three pathways that a CDC scheme can follow if it gets into trouble and finds itself in difficulties with promises it is making. They are called continuities because they protect members in the way that the PPF protects members of DB schemes whose sponsors are not able to meet obligations. We should not pretend there is not risk here, there is risk in everything. There is a lot more risk in pretending that the future is not full of risks, it is best that future risks are managed.

The three continuities are (to simplify)

1. That the CDC proprietor and trustees set things right and with the help of TPR get back on track.
2. That if that fails that an agreement is made with another CDC scheme for the other scheme to take on the members and the transferring scheme to close.
3. That failing one and two, a third continuity path is followed that swaps the individual member rights to a pension to rights from a purchased annuity.

Let’s not pretend that any of the continuities are easy , but they minimise the concerns to members. There are of course similar paths for DC and DB schemes to follow and for the most part we can term them improvement, consolidation or buy-out. The PPF is not an option for DC or CDC schemes, it is exclusively for DB schemes that have guarantees which DC and CDC schemes don’t have.

So how seriously should CDC setting up today be taking continuities?

Very seriously, I’d say!

1. To launch, a CDC proprietor must display to TPR that it has capital behind it to make sure that it can drawdown if running the scheme is tough. As the first line of defence, the capital can be used but must be replenished.
2. When there is a market, there should be agreements between the limited numbers of CDC schemes to take on or have taken on, the promises made to members . Coincidentally, I am speaking with the other potential commercial CDC together and on my agenda is what assurance we can give DWP and TPR that we’ll work together if either of us gets into trouble and need to consolidate
3. If there is no consolidation to be had then we have the insurance sector to fall back on and necessarily “continuity 3” is only to be considered as a last resort . But it would mean a systemic problem in my opinion and there is no guarantee that a systemic problem might not make any pension certain to be paid, even as an annuity.

Sometimes there is an expectation of certainty about the future that cannot be met. I can remember as a little boy the Cuba Crisis and being told by a girl at school that we would not make it into our teens because the world was going to blow up in nuclear holocaust.

That did not happen and had I taken her advice , she and I would have spent our time digging a nuclear shelter (ridiculous as it sounds today – we must have been 4 or 5 years old). It feels a bit like this setting up CDC today and if we spend our time worrying to a point that we’ve built a pension nuclear bunker, then we won’t have built a pension product that providers up to 60% more pension.

Growing up in the 1960s , nuclear holocaust was what I dreamt of.

But I have Claire (the girl’s name) in my head and it keeps me thinking steadily of worst case. If you can plan for the worst case you have a way to keep your dream open!