Decumulation CDC is gaining support amongst pensions professionals, with Simon Eagle of WTW winning an audience debate poll on the subject at the Corporate Adviser Master Trust & GPP Conference yesterday.
The audience of pension consultants, advisers, providers and other high-level industry stakeholders voted 66 per cent to 34 per cent in favour of the motion ‘This house believes there is a future for decumulation-only collective DC schemes’ at the end of the debate between Eagle and John Ralfe, the independent consultant. Support for the motion was greater after the debate than before, when an identical poll won 58 per cent support, with 42 per cent voting against.
The parameters of the debate were set to examine whether there is a case for the development of decumulation-only CDC solutions as an alternative to income drawdown or annuity for DC savers who need the entirety of their pot to pay an income for life and who do not plan to leave a bequest to their children.
Eagle set out a version of CDC that does not include intergenerational risk transfers, but that does keep all retirees within the same asset pool, regardless of age. He said that like annuities, it offers retirees the security of an income for life, although this could rise or fall depending on asset returns. But it would be able to invest more into growth assets than gilt-backed annuities, giving expected upside, although this is not guaranteed.
Eagle argued that retirees could get an expected income 50 per cent higher than annuity and would benefit from having their investment strategy and sustainable withdrawal rate managed for them within a single product.
Ralfe compared the idea of extra income with alchemy, suggesting it was not possible.
He pointed out that the structure Eagle proposed would deliver the same returns as a drawdown solution with an identical asset allocation strategy, and that if, say markets fell by 20 per cent, income would also have to fall by 20 per cent too. He suggested that separate sections would be needed, to bring cohorts within two years of each other into separate pools.
Ralfe argued that a simpler way to achieve the same end was to pay a small percentage of the saver’s pot into a tontine for, say, 20 years into the future, run the pot down to that point, at the rate of your choice as appropriate for your personal changing circumstances, and then take the share from the tontine at that point if the individual is one of the survivors of the tontine at that point.
He also questioned how a decumulation CDC would come into being, as it would need an entity with a large cash reserve to get it going.
Eagle countered that he wasn’t talking about a tontine, rather a managed product, and that running drawdown and entering into a tontine could be more expensive and required two products, not one.
Eagle said: “Decumulation CDC avoids the issues with drawdown where you don’t know how long you’re going to live. So if for example, if your life expectancy is 20 years, maybe your client adjusted to go for a pension value in 20 years, because if you do that, there’s half a chance that you that you die before, half a chance that you live beyond that and therefore would run out of money if you just carry on with that drawdown pace. So whichever of those two happens, it hasn’t put your retirement money to good use if what you want from it is an income in retirement. It isn’t it isn’t achieving that very efficient
Ralfe said: “The advantage of what you’ve been outlining, Simon, is longevity. And I would agree. Don’t confuse it by wrapping it up as an investment product, as a managed investment product, which requires everybody to have the same asset allocation, which is absolutely bonkers.
Eagle argued that many people do not want to choose their own investment strategy into old age. He also suggested the terms of admission into the pool would be on predicted longevity, so this approach would be used to facilitate joint life benefits.
Ralfe said: “If what you’re trying to do is smooth longevity, you can do it very easily on the back of an envelope. You choose to hold the pension and invest it in whatever. You then draw down for 20 years and you put say 10 per cent of your pension pot into a 20-year tontine that invests on a low risk basis. And at 20 years, [the tontine] is split amongst the members who are still alive.
“If it is about managing longevity, that is a much, much easier way of doing it. It’s much more transparent, it’s cheaper and it doesn’t it doesn’t have any of the pretend bells and whistles. So [decumultation CDC] has no investment advantages, it does have a longevity smoothing advantage, but that can be created more easily and more cheaply by doing something else.
“If what you’re saying is, oh, this is just a tontine, except we can’t have tontine, then people here should be twisting your arm to be lobbying the government to change the rules on tontines.”
In a debate on accumulation CDC plans at the Corporate Adviser Summit in 2018 between Brighton Rock Group’s head of research, Con Keating and Ralfe, adviser opinion was far more negative, with just 8 per cent of those polled saying they would opt for a CDC arrangement if they were 25 years old, and just 19 per cent supported the government spending parliamentary time legislating for CDC, which had not, at that point, reached the statute book.
In a recent blog in Corporate Adviser, Eagle set out his vision of how a decumulation-only CDC could work.