1. TUC Pensions Conference 21 January 2015
What does CDC mean for a Trustee? Kevin Wesbroom / Sandy Maudgil / Hilary Salt
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TUC Pensions Conference
21 January 2015

2. What women (and men) want:
Q: Which best describes your attitude to how you might spend your pension fund?
Q: When you retire, how do you think you will use your pension fund?

3. 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

4. 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):
Revaluation target – and this year’s increase to Target Pension – set at (100+x)% of CPI
One-off benefit cut applied to all Target Pensions, including those in payment

5. 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 … ?

6. Modelling - Historic Outcomes
Retirement after 25 years

7. Modelling - Predictability
Variability of project pension for 2011 retirements

8. Modelling – Absolute Level of Benefit Increases
Combined effect of historic adjustments which our hypothetical 1% CARE scheme would have made over time

9. 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
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

10. 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 …

11. Benefit payments, other duties Agreement to provide scheme
A lot like a DB scheme …
Trustees
Contributions
Contributions
Benefit payments, other duties
Employer
Members
Agreement to provide scheme

12. 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 …

13. 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

14. 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

15. Questions for a CDC Trustee: Funding
Regular Contributions
One off Contrib- utions
Investment Returns
Pension with increases
Expenses
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
Planning Valuation discloses a 10% deficit

16. 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!

17. 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

18. Key Issues for CDC trustees
Investment Strategy
Member Comms
Expenses
The Planning Exercise
Members have to trust the trustees
and the scheme actuary!

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