I had an interesting conversation with Ros Altmann yesterday evening. She explained her reservation with a CDC scheme’s fairness being its inability to deal with the unexpected behaviour of members coming to retirement who prefer not to have a CDC pension increasing with inflation and lasting as long as they do.
I can imagine many people facing their future with a wish to have flexibility for a number of reasons but most obviously because they are doubtful they will live long enough. I lay in a corridor in a Slough A&E for more than 24 hours earlier this month , pondering my longevity – it is an excusable thing to think about and people who lose faith in pensions and chose freedom from pensions are exercising a freedom that JS Mill would have promoted!
If you are running a small CDC scheme, where the person knocking on the exit door will demand a large proportion of the scheme, I can see there being a problem treating him fairly and giving him a cash equivalent with ease.
Which is why CDC schemes do not work for a few people and certainly not for individuals who own much of the rights of the scheme. If you have worked with small self administered pension schemes, you would not consider them CDC schemes without having a lot of confidence in the longevity of your members (or at least the confidence that they understand how sharing works from all members).
There was, on Martin Lewis’s show this Tuesday, a case of someone trying to get out of a DB pension scheme because they knew they could do better with freedoms with their short life expectancy. This was a tale of poor administration and poor communication.
So CDC schemes must have clear rules, clear communication and good rules. This is discussed in a recent paper by Hymans Robertson where one of the “myths” is that people can’t get out of CDC when they know pension freedoms are better for them
You can download the “myth busting” from this link.
Here is how Hymans Robertson explain CDC to employers (on this)
The secret is size
We all know that where there is a large crowd, there will be accidents. Go to football matches and there are ambulances awaiting outside the stands, where the crowd is big, to ensure that accidents can be dealt with quickly and easily.
Of course you need proper governance to make sure that crowds don’t get into trouble (we learned that in football in the 1980s). Size can be dangerous if you don’t manage crowd risks.
We need to have administration within CDC schemes that follows the same principles but the first principle is that the care works where there are enough to share. The sharing is fair where those following the obvious route – taking a pension for life – are not impacted by those who want freedom (for whatever reason).
To follow my football analogy, the vast majority of football fans will go to games week after week over time, the majority of pensioners in a CDC scheme will get paid every month, but some will leave to die, and some will leave to do something very different with their money.
But where the crowd is big enough, then the scheme can sustain demands on its liquidity and will not see its strategy having to alter because a group of several, leave because pensions don’t work for them.
Con Keating makes an additional point in comments, concerning lines of credit that can help where large numbers choose to move from a CDC scheme by taking out a line of credit.
Of course it makes more sense that there is a sense of mutuality between all in the CDC and this is helped by employers feeling mutuality with other employers as well as members feeling a part of a common crowd (think football). If CDC is to work , it depends on size and common purpose and it needs people acting as trustees who understand the needs of the members as a whole but also the needs of those who are different. There must be rules and the rules must be known by members or explainable to those who have questions.
There is never going to be a system of perfect sharing. The State Pension has winners and losers and this is explained as social insurance. CDC schemes will get less out than they put in for reasons of health. There will be others who will outlive almost anyone. There will be some who will walk away from a pension who live a long time too! But ultimately we have to have a pension scheme that is reasonably fair to all and most importantly can be explained easily to those who need to understand their choices when it matters to them.
For most, that key point is in the years leading up to retirement, the years I am in at present, it was a good discussion with Ros Altmann for obvious reasons!
It was good of LCP to offer places to a debate on the IFR to ordinary fans like me who have no interest in the IFR other than the football that we watch.
