It is really good to read a consultant taking on CDC’s investment strategy from the member’s point of view. The key metric for DC has been the size of the pot, but this is not what CDC is about. It will of course offer a tax free cash sum to members and this will likely be an efficient way to keep flexibility in individual or family finances. But the majority (let’s say around three quarter of the value of CDC to members) is paid as an inflation linked pension.

CDC is about providing a balance between cash and pension as DB has and still does.This is important to members as a balance of growth and stability is important to those running the scehme.

So far – and this includes this work of LCP, there has been a fascination with converting payroll deductions (and what employers pay each month) into pensions. I would add to that , the capacity of the CDC scheme to maximise the cash it is allowed to pay to members when they retire (annoyingly called “crystallisation of benefits” when we mean “taking a pension”.

Royal Mail offers those who enter the CDC scheme a separate cash scheme which is DB. We think it unlikely that any workplace CDC pension will do this, it is too complicated to do it over multiple employers. So I hope that LCP will work with those designing the delivery of CDC schemes (the Proprietors) to make sure that the balance between cash now and pension tomorrow , is part of what the investment strategy is built around.

There needs to be a close working between actuaries (those who price and those who ensure that what is delivered is what is affordable). The pricing of pension from each contribution is based on best estimates of what will be available to pay pensions after cash is taken. The valuation of the fund determines the increases in future pensions promised members and how those getting a pension paid, see their pensions increase.

There have been sensible reactions to LCP’s eight page examination of what can be done to maximise and stabilise CDC pensions when they get paid. This is the one I think captures the spirit of a good article best.

It picks up on a second feature of CDC schemes going forward that we at Pensions Mutual think most important, that is to ensure fairness of pensions offered in exchange of contributions, because this should be grounded in data about what the pension scheme can afford.

To begin with, there will have to be a lot of assumptions but over time the data on how the fund is doing and the demographics of who’s in the scheme will determine the price people buy pensions at.

This means that data needs to be with actuaries and those investing at touch of a pad (as illustrated). The investment team cannot wait till the end of the year for the formal valuation,  fairness means that every contribution is considered separately, even in a month a conversion of a contribution to future pension bought, can change.

You will notice that in the short term, these assessments must be based on an assessment of what the pension’s investment will deliver and this is when the actuaries must work hand in hand with CIO (or outsourced CIO as BlackRock do for Royal Mail’s Collective Scheme).

What LCP’s article tells me is that the member’s experience must come first and that what we mean by transparency , must be a publication both of what the best estimate of pensions that are expected to arise but publication of how the investment strategy is being delivered.  We will (as members) need to know what external pressures are impacting the promises (inflation mainly but the length of time the pensions are estimated to be paid as well).

Here is this translated into LCP’s language. I hope that I am with them at the high level as I am not competent to do the actuarial projections for the investment strategy nor the capacity to choose the investments to best meet the strategy

Risk

We all know that risk is bad in the short term, if we are saving for a holiday we want certainty from our savings and will stick with cash. If however we want to have a pension paid for the rest of our lives, we need to be sure we are part of something collective. As Massi of BlackRock puts it, we should be in an orchard not relying on a single tree.

There are two quotes from LCP’s team working on helping people like us to deliver best outcomes with best endeavour.

LCP partner Steven Taylor said: “CDC investment strategy is not about avoiding risk; it is about how investment risk is translated into pension outcomes over time. That requires a shift in mindset and a more innovative approach to investment design. The key challenge is building portfolios that can absorb shocks, recover from stress and continue to support sustainable pensions for members over decades.”

Partner Laun Middleton added: “CDC needs a broader investment toolkit than traditional pension investing, drawing on the best ideas from both DB and DC. Long-term growth remains essential, but it must be combined with portfolio designs that are resilient through inflation shocks, market stress and changing economic regimes.

“The challenge for CDC investors is not whether to take risk, but how to build portfolios that can continue supporting member outcomes through decades of uncertainty.”

This translates into a series of trade-offs between growth and security that lead to a conclusion that a balanced investment strategy best delivers best outcome. I take this to mean maximised cash and more importantly , the best wage for life that can be paid.

Thanks LCP; we need consultants to set down their ideas so that we have templates for our thinking as we move towards implementing a CDC investment strategy next year.