CDC schemes will diversify the pensions landscape, offering a half-way house between defined benefits schemes like final salary (collective, hefty guarantees) and defined contribution like Sipps (individual, no guarantees). We’re not at all sure that CDC schemes will enjoy widespread take-up or that they’ll live up to the promises of more pension for the same money.
The big problem is that CDC schemes are based on collective risk sharing, with individual interests subordinated in pursuit of better overall returns for all. They work very like with-profits funds with actuaries using their skill and judgement to share returns across members and across generations of members. This was fine as far as it went until the Chancellor stood up and promised that anyone who wants to can take their money out any time from age 55 onwards. This means an employer selecting a CDC scheme may have to explain to their staff why they’ll be missing out on these new pension freedoms. Good luck with that.
It doesn’t stop there. These schemes probably won’t be subject to the newly announced pensions charge cap of 0.75 percent. Some guaranteed pensions can only deliver on their guarantees by charging significant additional premiums to cover the cost of hedging the fund investments. Over a 30 or 40 year investment term, scheme members are better served by investing for fluctuating but higher returns (with a price cap on charges), rather than modest but predicable returns without any cap on charges. The only real justification of CDC schemes is that the certainty of returns may encourage investors to commit more money into them in the first place. Even that seems redundant, given the upsurge in interest following the Budget.
The retirement guidance guarantee
Elsewhere, work continues on the Chancellor’s promise of retirement advice (guidance rather than advice in regulatory terms). There is a significant risk in this Guidance Guarantee could leave George Osborne emulating Robert Maxwell as a destroyer of pension savings. The problem is that the insurance companies, serial missellers of poor value annuities for all these years, have worked out that the Guidance offered in the budget is little more than an irrelevance. They are increasingly adopting a position that they (the insurers) can’t be seen to be impartial and so shouldn’t have anything to do with the Guidance. Instead, they say, the Guidance should be offered by someone independent like The Pensions Advisory Service. Why are they doing this? Because they know this Guidance won’t influence investors’ buying decisions. Meanwhile, the insurers will keep talking to their customers, keep exploiting customers’ inertia and keep selling inappropriate and poor value retirement income products.
With apologies for the metaphor, the Chancellor and consumer groups seem to think that like the French with their Maginot Line, they can build their Guidance and it will protect investors; it won’t. Like those canny Germans driving through Belgium, the insurers will simply bypass the Guidance and keep on racking up the misselling. The only way to fix this is to regulate the product sales. This regulation needs to be in place by next April and so far there is little evidence that the Treasury has woken up to the fact that they are building their defences in the wrong place.
