What does CDC mean for a Trustee?
Kevin Wesbroom / Sandy Maudgil / Hilary Salt
TUC Pensions Conference
21 January 2015
Prepared by Aon Hewitt / Slaughter and May/ First Actuarial
What women (and men) want:
Q: Which best describes your attitude to how you
might spend your pension fund?
The ABC of CDC
21 January 2015
Q: When you retire, how do you think you will use
your pension fund?
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What is a Collective DC plan?
The employer pays a fixed contribution rate
The member gets a DB-like Target Pension
– pension paid from the plan
– revaluation and indexation to preserve real value
No individual accounts
No member decisions on investments
No member decision on decumulation
We can “square the circle”
– the Target Pension is not guaranteed
– benefits adjusted to ensure cost stays constant
– indexation and revaluation is not guaranteed
– even the basic pension is not guaranteed in extremis
The ABC of CDC
21 January 2015
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Collective DC Designs – Single Employer example
Target Pension could be conventional DB design – eg CARE
– Or could be Pension Purchase approach (DC style)
1% CARE plan payable from State Pension Age
– CPI indexation pre and post retirement targeted
– Cost neutral early or late retirement terms
– Single life pension – can convert to contingent spouse’s
Employer cost – set at 10% of pay
Rules needed for changes to Target Pensions and new benefit accrual
Example: funding level kept within a window of 90% - 110% by adjusting (in order):
i. Revaluation target – and this year’s increase to Target Pension – set at
(100+x)% of CPI
ii. One-off benefit cut applied to all Target Pensions, including those in
payment
The ABC of CDC
21 January 2015
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Collective DC - the selling points
• Bigger, more stable outcomes on average
• Avoid opportunity cost of annuity purchase (= lower yielding asset) at potentially
inappropriate time
• No daily dealing – so can use illiquids like infrastructure
• Time horizon of the group, not the member
• Trustee decisions – not members
• Where to invest
• How to create a retirement income
• How not to outlive your savings with new Budget flexibilities
• Better returns?
• Professional advice
• Without consent
• Remember DB before every company car had to be a Rolls Royce … ?
The ABC of CDC
21 January 2015
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Modelling - Historic Outcomes
Retirement after 25 years
The ABC of CDC
21 January 2015
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Modelling - Predictability
Variability of project pension for 2011 retirements
The ABC of CDC
21 January 2015
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Modelling – Absolute Level of Benefit Increases
Combined effect of historic adjustments which our
hypothetical 1% CARE scheme would have made over time
The ABC of CDC
21 January 2015
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The Perfect Pension Plan?
PLUS
CDC Pension Plan
All paid by employer (12%)
All pension - no commutation
Solid reliable base for pension
planning
View Target Pension online
anytime
Annual statement and
confirmation of Target Pension
amount
The ABC of CDC
21 January 2015
Retirement Spending Account
Your personal contributions (4%)
Invested for long term saving
Accessible from 55 onwards
Full freedom to decide on drawdown
Tax free savings, tax free roll up,
largely tax free drawdown
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Legal Issues
From employer perspective:
– Key issue is to be clear that this is a collective benefit scheme and not a
DB scheme
– Need to be sure that members are not being misled. This is a DC plan
but (hopefully) without the investment inefficiences associated with
individualism.
From member perspective:
– What is this "collective benefit" thing?
– Can I trust it?
– How do I know you're not just ripping me off?
Governance is key.
Trustees holding the line …
The ABC of CDC
21 January 2015
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A lot like a DB scheme …
Trustees
Employer
The ABC of CDC
21 January 2015
Agreement to provide scheme
Members
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Key Duties of Trustees under CDC
DB: Trust Deed/Employer sets out the benefits, and Trustees decide how much
Employers need to pay.
DC: Trust Deed/Employer says how employers will pay, and members get what they
get.
CDC: Trust Deed/Employer says how much employers will pay, and Trustees need
to work out a "target" benefit ...
Pension Schemes Bill requires Trustees to:
– set a target benefit at a level which ensures probability of target being met is within
a specified range
– decide the investment strategy
– owe members a non-excludable duty of care (more important than normal DB?
risk all sits with member)
– determine policy regarding "deficit" or "surplus" (inter-generational fairness?)
– determine any transfer in/transfer out policy ("gaming the system"?)
– communicate a wholly new concept to a membership that may already be
confused …
The ABC of CDC
21 January 2015
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CDC as an alternative to DB (DB-)
Focus is on a target benefit outcome
All members get the same accrual rate and the intention is that this remains stable
Might build up a funding reserve or cushion so benefit can be maintained
Suitable for
- one employer – perhaps replacing db scheme
- Schemes with employer contributions (so cross subsidies acceptable)
Trustee Role
Similar to that of current DB scheme trustee – especially
on funding
Greater role in communications
The ABC of CDC
21 January 2015
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CDC as an alternative to DC (DC+)
Focus is on a fixed contribution
Members receive a target pension that varies with age and market conditions
Changes in the target expected
Planning on a best estimate basis with no intention to build up reserves
Suitable for
- Lots of employers or no employer
- De-cumulation vehicle
Trustee Role
Master trust type trustee role
Role much more pivotal and demanding
The ABC of CDC
21 January 2015
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Questions for a CDC Trustee: Funding
Regular Contributions
Pension with increases
Pension with increases
One off
Contributions
One off
Contributions
Investment
Returns
Regular Contributions
Pension with increases
Pension with increases
Expenses
Planning Valuation discloses a
10% deficit
The ABC of CDC
21 January 2015
Vary the pension – so
reduce £10,000 pa
pension to £9,000 pa
Vary the pension
increases – reduce from
inflation to (inflation -1%)
pa
Use a bonus declaration
and first make any
reductions to bonus
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Questions for a CDC Trustee: Communications
Your target pension is £1,000 per month
There is a 50% chance you will get
more than this and a 50% chance you’ll
get less than this
There’s only a 50% chance I’ll
get what you are promising me!
Thanks but no thanks!
The ABC of CDC
21 January 2015
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Questions for a CDC Trustee: Communications
There’s a 95% chance you’ll
get at least £700 per month
from the scheme
So I’m guaranteed to get £700
per month. But that’s less than
Scheme A were offering
The ABC of CDC
21 January 2015
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Key Issues for CDC trustees
Expenses
The Planning
Exercise
Investment
Strategy
The ABC of CDC
21 January 2015
Member
Comms
Members have
to trust the
trustees
and the scheme
actuary!
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The ABC of CDC
21 January 2015
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