CDC pensions can hope to invest in the sort of real assets that long-term pension funds should hold, like infrastructure projects for improving roads, bridges, schools or railways, as well as in equities and property development.
The trustees managing the CDC fund will share out the spoils in a collective manner, organising the cross subsidy between those who live long and those who die early, spreading costs over both large and small pots, and smoothing out the short-term ups and downs of market prices.
The normal commercial dynamics do not apply in schemes managed by trustees. While a purely profit-driven approach pressures the managers into offering the customer a little less and charging them a little more for it, trustees have a duty to protect the members’ interest and to ensure that the scheme managers are properly following the trust deed and rules.
I have sat in many trustee meetings and seen them spend money on members, when a purely commercial approach would have been to cut back.
However, CDC schemes still need a financial backer, despite what the Royal Mail is saying on this.
The importance of having a ‘capital adequacy’ buffer becomes apparent when what yesterday’s economists thought was a temporary market downturn turns out to be a permanent correction.
In these cases, CDC scheme trustees could find that they have reduced payments too late – as happened in Holland. In this instance, the balance can either be paid for from the capital buffer or from future new entrants.
But with a financial backer fresh capital can be raised, averting this scenario from playing out in tough times like we saw back in 2008-09. Of course, capital buffers have to be paid for, so the reward mechanism for the scheme funder can be built into the rules and honestly managed by the trustees.
The new sort of pension CDC offers – let us call it a ‘later life replacement income’ – will be particularly suitable for those who can realistically afford one-off advice at the point of retirement rather than ongoing advice throughout retirement.
As a one-off transaction, an adviser could help a good many people to understand whether CDC is right for them and then choose between competing CDC decumulation offerings as they come to market.
Adrian Boulding is director of retirement strategy at Dunstan Thomas