A new Nest publication places CDC firmly back on the agenda, writes the TUC’s Tim Sharp
It was easy to assume in the aftermath of the General Election that Collective Defined Contribution (CDC) pensions had been packed off to the West Country with outgoing pensions minister Steve Webb, never to return.
But the publication by government-backed pension scheme Nest of its blueprint for retirement income in the era of pensions freedom not only brings desperately-needed rigour and analysis to the subject. It also places CDC in the mainstream as at least part of the potential solution to the nation’s retirement quandaries.
Nest’s three-pronged plan envisages splitting a pension pot between a drawdown element, which will remain invested and from which an income will be paid, and a cash pool for one-off expenses. Insurance premiums of one per cent to two per cent would be sliced off the income to fund what Nest styles as “later life protected income” that pay out from around age 85.
In its blueprint Nest discusses using deferred annuities to provide this final income stream but cautioned that the UK insurance industry may struggle to write good value policies. This is, in part, because the variability in the possible outcomes for deferred annuities is quite wide and capital rules potentially onerous.
An alternative explored by Nest is a form of CDC. In this model incomes are supported by a collective pool of assets. Because capital requirements are less, this could operate with lower costs. Longevity risk is pooled. Incomes, however, are not fully guaranteed and underwritten – but the collective aspect means they should be more predictable than in the earlier phase of drawdown.
Such schemes are already being explored in Australia, where there are worries about savers in defined contribution schemes running out of money too early in retirement.
Nest’s interest is significant because the principal criticisms of introducing CDC to the UK rarely concern its feasibility. They focus on demand for such a product and whether anyone will risk setting up the first scheme.
“CDC is merely a common sense solution to the dramatic shift in the pensions landscape”
It is true that post-election, we have not seen militants from the Friends of CDC marching on Parliament.
Indeed, it would be hard to get any decent chanting going. “What do we want?” “Longevity pooling and collective investment.” “When do we want them?” “Whenever is most prudent after extensive evidence-gathering and consensus-building.”
But there is a strong argument that pensions policy is best when it doesn’t excite passions. And CDC really is merely a common sense solution to the dramatic shift in the pensions landscape that could leave the individual bearing unacceptable risks in both the accumulation and decumulation phases.
A number of barriers remain to the introduction of CDC in the UK.
Nest will need to persuade policymakers at home and in Brussels to give it permission to offer retirement income products.
There may also have to be an acceleration in the Department of Work and Pensions’ work on developing CDC regulations, which have slipped down the department’s lengthy to-do list.
But what the Nest blueprint tells us is that CDC is not something that Steve Webb will discover in his attic in a few decades time tucked in next to his automatic enrolment-themed West Ham shirt and a Christmas card from Iain Duncan Smith. Rather it is a practical answer to a pressing issue of public policy that is rightfully attracting serious consideration.
Tim Sharp is the Trades Union Congress’s pensions policy officer.