I’m interested by the anonymous thoughts of LCP on the spread of interest in CDC.
UK CDC schemes better placed to succeed than earlier models: LCP
“UK CDC schemes better placed to succeed than earlier models”
It is a complicated thought. LCP are saying that we are likely to do better implementing CDC over here then they did in the first shot at CDC in the Netherlands , because we have learned from them.
Transparent risk-sharing and a simpler benefit structure mean UK Collective Defined Contribution (CDC) schemes could be better placed to succeed than earlier international models, particularly those in the Netherlands.
I think the excursions of the DWP to Holland and elsewhere have convinced us that a simple way forward is easier to do and more likely to win support. They have also learned that trying to teach over 100,000 postmen about actuarial factors was never going to work, Postal workers, like most workers (even in the financial services industry ) are not going to engage with niceties of pricing, valuation and how we can run a scheme without a surplus or deficit belonging to a corporate sponsor.
LCP has highlighted several strengths in the UK approach in a new analysis, arguing that the Dutch system is often misunderstood. It says that it is sometimes seen as evidence that collective pensions “failed”, but the analysis suggests it offers useful lessons in how these schemes can evolve.
To put it simply, those saving for retirement need to be comfortable that they are being given value for money from the money they part with while they work. Right now even so called experts cannot explain the Dutch system and we need to move on from that
According to LCP, the key takeaway is that success depends on how investment risk is built into the design and explained to members.
LCP have made it clear that 70% of the improvement in pensions that comes out of managing pensions collectively comes from doing it from one pot collectively and not giving everyone their own pot to manage or to give back to fiduciaries to manage for them. As the numbers who want to DIY their pension is typically less than 10% of employees, it looks like “opt-out” of CDC to DIY DC (aka SIPP) will be around the levels who opt out of Auto Enroment.
The analysis points to the UK model’s clearer approach. Target pensions adjust as markets move, so funding changes are recognised early rather than building up over time. Members are also told upfront that benefits can go up or down, helping to set more realistic expectations.
The odd thing is that the last 15 years have been good years for investment despite such disasters as COVID , the Ukraine investment and now the war against Iran. But people are frightened about the impact of all the disasters and see little of the long-term market movements in their favour.
Frankly the less we think about being responsible for our pensions and the more it is explained that it is not for them to worry, the happier we will be. We all know that setbacks happen, we feel it in inflation, with interest rates and we get personal financial crisis’ that hurt us, we need out pensions to be boringly reliable, not guaranteed, CDC is unlikely when it does badly to decrease much more than the promised increases , when it does well, pay slightly more than inflation as an increase – going down and up in CDC terms is not the kind of disaster we’re getting on our DC pots right now!
Teaching people that nothing is immune from downturns , is not going to freak a nation out, what would freak us out is to tell people they’d get no help or that they’ll get guarantees – neither prospect is helpfuil.
It also highlights the absence of large smoothing buffers. These can reduce short-term volatility, but they can allow losses to build up and be passed between generations. The UK approach instead links outcomes more directly to current funding levels.
The problems we had with with-profits were to do with the abuse of buffers and the lack of transparency in paying out benefits. It is the same problem they had in the Netherlands. The rule is not to build up surpluses nor to allow deficits but manage expectations through getting us to thing longer term. The accounting nightmares of DB and the lack of management in DC are a nightmare either for member or for sponsor. A middle way is required.
According to the analysis, the framework has been shaped by international experience, including lessons from the Netherlands, with a stronger focus on clarity and fairness between members.
Fairness and clarity can be achieved by being straight and working together – that includes regulators, sponsors , trustees and those who provide the CDC management.
It also stresses that investment strategy is built into the design of UK CDC schemes. Risk-sharing is not treated as an afterthought and clear rules are in place so benefits can rise or fall in line with the scheme’s funding position.
This is right, the idea that we all can be winners was built into the thinking of DB, because sponsors were always there to help out, the idea of DC was that we all should look after ourselves or take personal advice. We have lived both dreams and seen both turn to nightmares.
LCP partner Launa Middleton says: “Collective pensions are often said to have ‘failed’ in the Netherlands. But the reality is more nuanced. The Dutch experience shows that the durability depends not on avoiding investment risk, but on how that risk is recognised and shared across generations.
The bottom line is that if you don’t go for the growth and take the risk, you will not get there. There is an opt-out of risk, money can be managed through a bank account or national savings but that doesn’t work over time. People know damn well that they have to take risk and by all being in it together – they will get there. We do not need to personally expert, we cannot rely on the boss to bail us out.
“For the UK, the challenge is not to prove that collective pensions can generate higher returns, but to ensure that the risks taken are consistent with what members understand and trustees can manage over the long term.
This is spot on from LCP. Most people never expected to be made wealthy either on their own or with an adviser. Nor did people expect bosses to guarantee them deferred pay. They wanted a wage in retirement based on what everyone else is getting “risk sharing”.
“Thequestionis not whether CDC involves risk, it always does, but whether that risk is recognised and governed before expectations move beyond what economics can sustain.”
When we watch the news we are part of a larger group, . We share good news and bad – we are after good management and fairness. That is what CDC should go for; it’s more in tune with our expectations than either DB or DC.
Local Equity Returns Over 15 Years These are charted as above. The UK {US} annualised equity returns fell between 3.86% {4.19%} and 27.53% {18.80%}, averaging out at 11.49% {11.31%}.
