Industry sceptical about benefits of CDCs

A lively debate on the issue was held between Brighton Rock Group’s head of research, Con Keating and John Ralfe, of John Ralfe Consulting.

Keating supported the motion that the government should spend parliamentary time facilitating these new CDC pension schemes.

But a poll of leading corporate advisers and workplace pension providers showed that only 19 per cent of delegates agreed with this motion.

Just 8 per cent of delegates said they would opt for a CDC arrangement if they were 25-years old; this number actually declined from a similar question asked before this debate took place.

There was clearly sceptism on how these schemes might work in practice, and whether they will deliver value for members.

Ralfe – who opposed the introduction of these schemes – did concede that a CDC structure has the potential to deliver additional returns for members.

However he says: “This isn’t the 30 to 40 per cent that some have claimed. Any additional return is likely to be in the region of 5 to 10 per cent. And the question has to be asked where this extra juice is coming from.”

He also says that there may be other solutions available that deal with the question of pooling longevity risk. But he suggests that these may come from insurance solutions rather than adopting a CDC model which mergers longevity and investment risk.

Keating points out CDC will combine accumulation and decumulation strategies within a DC framework. He says that pooling longevity risk and risk-sharing should deliver benefits for members.

Unlike DB schemes the company sponsor will not be required to fund any deficit. If the scheme fails to meet its targeted returns then benefits will be cut.

Keating says this can be done in a way that is “equitable” for all members of the scheme. The targets could be set by trustees he says, with adjustments hardwired into the rules of the scheme should investments fail to keep pace with these targets.

He argued that the likelihood of those in retirement seeing pension benefits cut were “rarer than hens’ teeth” and were less likely to occur than a DB pension scheme failing and rolling into the PPF.

Keating says that this CDC model will create new challenges for the asset management industry, to deliver targeted returns over longer periods of time rather than trying to achieve maximum returns all the time.

However Ralfe pointed out that this model transfers risks from one generation to the next, with younger workers paying into to support those who are retiring before them.

He described this as a “pass the parcel” and questioned why younger employee would want to join such a scheme.

Delegates also questioned whether there would be a problem with self-selection: particularly if those in ill-health withdraw their funds. All members would be free to withdraw the net asset value of their fund at any time.

Keating says he does not forsee this a problem. “Research suggests that those who withdraw funds tend to be those who are more highly educated, with larger assets. It is this sector of the population that lives longer.”

He says though that any scheme needs to communicate with members clearly so they are aware benefits can be cut. Examples from the Netherlands show that this has not always happened.

Ralfe adds: “We are left with a number of questions: what is the underlying theory and practicalities of running such schemes. And who will regulate them effectively.”

But Keating points out that there is a groundswell of support for these pension schemes, from both Conservatives and the Labour opposition. He says: “Very little legislative time is needed, this could be done via a statutory instrument.”