I see CDC as being aimed at those (the majority of the public?) who want to know they are not making a terrible decision joining the scheme, that will be reassured they will not run out of money and, if things go according to planned expectations, they will get a bit more than their minimum needs met in retirement.
I don’t see it being aimed or suitable for those who have high net wealth and are confident they can better the returns themselves or who want to maximise funds for inheritance. Some advisors will consider including R-CDC a useful addition to an annuity/drawdown mixed solution for DC decumulation, others will shun it. But those who have DC of <£100k struggle to find an advisor anyway.
Describing CDC as a “wage for life that is aiming to grow to beat inflation” helps that first group and will be of less interest to the second. To reassure the prospective member that description could be accompanied with illustrations along the lines of “If someone on a typical (median) wage had paid X% matched by an employer in for the past 20 years they’d now retire on a pension of £Y.” and “If a pension had started being paid from the scheme 10/20/50/100 years ago it would only have failed to keep up with inflation W% of the time and would only have been cut V% of the time”.
The communication is key and needs to be designed to answer the questions the typical prospective member has, highlighting the features they are looking for and with clear warnings of the potential downsides, e.g. loss of death benefits.
The question that should be on the lips of anyone considering a CDC scheme is “can you meet your promises”. Underlying that question is one asked by Andy Smith – can a CDC scheme expect to have its collective fund by 5% more than inflation? Here are two challenges to the assumption we are currently making
This comment from a friend of this blog makes me think again about the assumptions we are making. Derek Scott comes in with an even more demanding set of questions.
As it happened, we had a meeting of my company to develop our reasoning for believing we can, yesterday afternoon. We concluded that using the blunt tools that we have at our disposal, we can have confidence. Reading the comments below, it would seem that we need to turn to America to find historical evidence of what a CDC style fund could achieve. We came to that conclusion to, but I will be making inquiries of our academic readers to find out if we can get equivalent data from UK pension funds.
I believe CDC can give a better answer about the assumptions that are made; CDC assumptions should be challenged and adjusted if they can’t be justified.
It is better that we do a review now, rather than the other side of approval by the Pensions Regulator. So thank you Bob Compton and Derek Scott. We will come back to you shortly. I hope that other proprietors of potential CDC schemes are hard at work as we are!