September 1, 2021
On 7th July 2021, the RSA launched its CDC Pensions Forum. The online event brought together leading politicians, notably Pensions Minister Guy Opperman and Shadow Pensions Minster Matt Rodda, along with an expert panel, which included First Actuarial’s Derek Benstead.
The CDC Pensions Forum, which aims to coordinate stakeholders and promote CDC pensions through rigour, research and debate, is the brainchild of the RSA. The online launch of the RSA CDC forum on 7th July 2021 was led by introductions from RSA’s David Pitt-Watson and three leading politicians each with a pensions portfolio – Pensions Minister Guy Opperman and representatives from the Labour Party and the SNP.
In the second half of the event, a panel of experts chaired by FT correspondent Jo Cumbo answered questions about CDC from representatives of the pensions industry. The experts were drawn from Forum member organisations Aon, CMS, First Actuarial, the IFoA and Lane Clark & Peacock (LCP).
Today is a very good day, says Pensions Minister
As everyone involved is aware, CDC has enjoyed cross-party support since the early stages of its journey. This was reflected in contributions from political leaders attending the forum launch. First up was Pensions Minister Guy Opperman. Today is a very good day, Opperman said. He welcomed the launch of the forum as “the right way forward”, and highlighted the importance of maximising engagement.
Opperman chose the event to announce plans to consult on the development of multi-employer CDC schemes in autumn, mindful as he is of strong interest in this area. This will come hot on the heels of the secondary regulations (fleshing out the Pension Schemes Act 2021) published in July, which will enable Royal Mail and hopefully other single employers to move forward with CDC.
Opperman’s strident enthusiasm set a positive tone for the rest of the event.
SNP spokesman David Linden voiced his support for a pensions system that is fair and equal, and celebrated the trade union origins of CDC in the UK. He recognised the role CDC can play in protecting individual members against risks such as longevity, investment and inflation. However, he also warned that only with impartial information can savers balance the benefits and risks for themselves.
Matt Rodda, Shadow Pensions Minister, acknowledged all the effort that has culminated in the Pension Schemes Act and ensuing regulations. In a mood of constructive opposition, he emphasised the importance of looking at the fine detail, considering all options available, and taking a wider view that would include issues such as state pension provision.
Findings from the RSA’s CDC poll
The RSA’s David Pitt-Watson talked a little about his organisation’s involvement in pensions issues. He stressed that the only way to get the framework for CDC right was to listen to stakeholders. With that in mind, he spoke about the RSA’s recent CDC poll.
Key findings from the poll, which received around 100 responses from across the pensions industry, are:
- 62% of respondents agreed (with a further 20% slightly agreeing) that the focus should be on creating an income in retirement, rather than a savings pot
- 70% wanted some form of multi-employer provision, while only 4% were focused mainly on single-employer provision
- 30% of respondents want whole-life provision; 30% are interested in CDC for decumulation; 50% say both or either. This suggests a decumulation role for CDC at the end of auto-enrolment and individual DC accumulation savings plans, sitting alongside the whole-life provision of schemes such as the Royal Mail
- A quarter of respondents are likely or very likely to adopt CDC pensions in the next five years. Another quarter said they would possibly do so. Barriers include clarity of legislation and the need for more education, debate and consensus.
The RSA CDC Forum is at present the principal means of achieving the consensus needed to deliver the “big prize”, as David Pitt-Watson described CDC. The RSA’s policy briefing – Next steps for CDC pensions in the UK – is well worth reading, not least for the detailed poll responses we’re not able to cover in this article.
The panel Q&A session
The launch brought together a panel of experts, chaired by Josephine Cumbo, global pensions correspondent at the FT, comprising:
- Matthew Arends – Head of UK retirement policy, Aon
- Thibault Jeakins – Senior associate, CMS LLP law firm
- Derek Benstead – Senior consultant, First Actuarial
- Caolan Ward – Policy manager, Institute and Faculty of Actuaries
- Steven Taylor – Partner, LCP.
Together they tackled a series of challenging questions from attendees.
How to get multi-employer CDC over the line?
Matthew Arends spoke for many when he said he felt hugely encouraged by the announcement of the multi-employer scheme consultation, which would include industry-wide CDC schemes. Steven Taylor pointed out that multi-employer industry-wide schemes are often unionised and well-organised solutions, and saw the RSA forum as a way of working alongside such bodies. The second CDC scheme after Royal Mail is likely to be a multi-employer arrangement, he said, and getting it over the line will involve continuous engagement with industry.
Does CDC deliver intergenerational fairness?
First Actuarial’s Derek Benstead acknowledged that intergenerational fairness around CDC is a widely-held concern. He explained that historically there have been two approaches to fairness in pensions:
- Equality of benefit accrual: Everyone gets the same pension accrual rate – for example 1/80th of salary for each year of service at Royal Mail. However, it usually costs more to provide a pension for an older person than for a younger person. So equality of benefit accrual turns out to be unequal on cost.
- Equality of contribution: In the individual DC world, the scheme has a contribution promise that is the same for everyone. But the contribution for a young person is worth more than a contribution for an older person because it has more time to grow.
These two options suggest the possibility of alternative CDC models, for example one based on a contribution offer.
Will alternative CDC models emerge?
Steven Taylor pointed out that many organisations will look at Royal Mail as a starting point, but will consider variations such as accrual rate and indexation alongside that model. There will be a great deal of innovation and development beyond that, Matthew Arends said, and more work lies ahead in the UK.
Panel members envisaged scheme designs with a flat rate of pension contributions per member, which would buy a CDC target pension on age-related terms. An individual with a DC pot could make a decision shortly before retirement to spend their DC funds on a CDC income for life, or alternatively opt for cash or an annuity on retirement.
The panel acknowledged the suitability of multi-employer, contribution-based CDC for small employers, the self-employed and individuals outside an organisation or industry providing CDC.
What are the risks of CDC?
Matthew Arends took us back to March 2020 when financial markets crashed by 20%, and asked how this might have affected CDC scheme members. In particularly lean circumstances, for example, even a 0% ’increase’ may be unaffordable and benefits might have to be reduced.
A team at Aon researched precisely this scenario last year. They analysed the year 2020 up to October and found that the CDC mechanism could absorb the setback in asset values and still expect to pay an increase, albeit a smaller one than expected. Indeed, Aon’s research found that the only time their hypothetical CDC scheme would have had to cut benefits was in the Great Depression of the 1930s.
How vulnerable would CDC scheme trustees be to litigation from members in this scenario? Thibault Jeakins identified member education as the first line of defence. He also argued that with strong governance, he would expect CDC to provide trustees with indemnity and insurance to meet legal costs. But in any case, DC pension pots already go down as well as up in value and litigation is not an issue.
Member education will be a key issue in mitigating the risk of a member incorrectly assuming that the CDC target pension represents some kind of guarantee. This is more of an issue with CDC than with either DB or DC because the message is more complicated and less intuitive. Trustees – along with employers and even government – will have to deliver clear, transparent communications.
Will pension freedoms and transfers have a destabilising effect on CDC? Derek Benstead explained that the actuary will track each member’s accumulated CDC pension in the fund. Individual transfers will have a neutral effect on CDC schemes, he argued, because transfer values will be the member’s share of the fund, and therefore fair to all parties.
Jo Cumbo asked whether there was a risk of CDC not delivering on its promise of fixed costs. Matthew Arends said he expected the regulations to set a cap on member charges. As for employer costs, employers have nothing to fear – their commitment doesn’t go beyond paying a monthly percentage contribution for each active member.
How transparent and open is CDC?
CDC has been compared to with-profit funds, giving rise to questions around transparency. However, a key element of CDC is trust, Derek Benstead argued. The Pension Schemes Act 2021 envisages that CDC actuarial funding policy will be published on an open access basis, available to both scheme members and the public. Indeed, this openness is a core principle behind the UK scheme design.
This openness also means that once the first CDC scheme is up and running, we can expect actuarial consultancies to analyse and comment publicly on it. Research will emerge from think tanks and academics. Derek Benstead said that if any critic of CDC had a better idea about how to run CDC, he’d love to know, because then we can make CDC even better!
Following Royal Mail, what are the prospects for take-up of CDC?
We saw considerable interest in the RSA’s survey results, but there was also a degree of caution. So what are the prospects for take-up once Royal Mail has launched the first UK scheme?
There were several reasons for confidence, Caolan Ward said. The cross-party support that CDC enjoys couldn’t be more encouraging. And from the start there will be a working model, Royal Mail, with regulations providing flexibility to explore alternatives.
Derek Benstead said that Royal Mail is typical of a large number of employers that have closed their DB scheme to new entrants but still suffer from escalating DB costs that suppress the contribution rate to the DC scheme. CDC presents the opportunity to unite the workforce with a single scheme, removing the inequity between older and longer-serving staff in DB on the one hand, and younger and shorter-serving staff in DC on the other. And CDC makes more efficient use of contributions than either risk-averse DB or individual DC. This should prove attractive to employers.
He also argued that we shouldn’t worry about the speed of CDC take-up. Royal Mail has spent over two years preparing for CDC; it will take time for the next wave of employers to create their own schemes, but they will be able to learn from Royal Mail’s journey. It’s already seen as a good solution to the problem of providing an income for life in the private sector, so there’s no reason why CDC take-up will not happen. As ever, with exponential growth, we can expect a slow start. But that shouldn’t worry us.
Collective effort is the way forward for CDC
As the speaker panel session illustrated, knotty issues like intergenerational fairness can’t be fixed by any one stakeholder. Everyone must play their part to build a long lasting pension model that will enjoy the support of employers, unions, members of all ages, government, policymakers and the pensions industry. But we’ve already come a long way since the day when CDC was a distant glimmer of a solution for the CWU and Royal Mail.
As Derek Benstead pointed out, the Royal Mail and CWU CDC story is a fantastic example of two bodies coming together and negotiating their future pensions. It was the CWU that brought the idea of flexible pensions to the negotiation table, which the Royal Mail managers then picked up and ran with.
Everyone recognises that the upside of CDC is well worth working for. We all want to live in a country where every person who saves throughout their working life can receive a cost-effective income which will last until the day they die. The RSA CDC Forum supports CDC as the solution to the problem of providing pensions to current and future generations of workers in the private sector. It’s good to see key figures in the world of pensions throwing their weight behind this.