Cdc

[RobertT]

Whereas I presume the annual CDC pension payments will at least rise by inflation. (without taking into account any possible reductions that we have mentioned)

The aim is that pensions will accrue at 1/80ths of pensionable pay and will increase by inflation each year. But that will only happen if investment returns allow.

There could be years that it does increase by inflation, more than inflation, stay at the same level, or go down.

There are no guarantees with CDC.

[Schiff]

The modelling that was done based on the CDC scheme being in place over the last century suggested there would only be a reduction on two occasions, which was during the Great Depression in the 1930's.
So if other notable stock market crashes aren't a factor, in theory it all sounds good.
But past performance is never a guide to future returns.

The problem is that basing an investment strategy on looking backwards can be perilous. The infamous Neil Woodford fund that collapsed a couple of years ago was based on a "proven" investment strategy which would always have worked looking back. As it was clear that things weren't going to plan and investors bagan pulling their money out then all of the safest and most easily tradable stocks had to be sold leaving the fund with only illiquid assets which were the most risky. I fear that people will do similar and transfer their share of the funds out of the plan the moment that things look at all dodgy, starting a similar chain reaction.

[RobertT]

The problem is that basing an investment strategy on looking backwards can be perilous. The infamous Neil Woodford fund that collapsed a couple of years ago was based on a "proven" investment strategy which would always have worked looking back. As it was clear that things weren't going to plan and investors bagan pulling their money out then all of the safest and most easily tradable stocks had to be sold leaving the fund with only illiquid assets which were the most risky. I fear that people will do similar and transfer their share of the funds out of the plan the moment that things look at all dodgy, starting a similar chain reaction.

I'm not sure the plan with CDC is to base things on the past, they just looked at what would have happened had it been set up in the past.
You can't look ahead at where stock markets will be decades in the future, after all.

Woodford was invested in a lot of small start up companies that failed, and the man himself lost the plot to some degree. Spending his time out horse riding and making trades while in the saddle.

Many people did lose money as a result of his mis-management, myself included.

I can't see the RM CDC scheme investing in anything as risky as Woodford did, but there's bound to be ups and downs nonetheless. That is part and parcel of investing and it's generally the bad times that are the best time to invest.

[renrag40]

The first thing you need to realise is that there are currently a few different RM pension schemes on the go.

Anyone who joined before December 1971 will be in section A of the RMPP.
Between then and April 1987 will be in section B.
Between then and April 2008 will be section C.

From then on(or technically from February 2009) new starters only have the option of joining the RMDCP, and anyone with 5(I think) years in that can then join the DBCBS instead and therefore be in section F of the RMPP.

A DC pension scheme is basically just a savings account that you, RM and the government contribute to. When it comes to accessing the money you can either buy an annuity which provides an income for life, or drawdown the cash where you decide when and how much you want.
Both options have the choice of taking 25% tax free.

Sections A, B & C of the RMPP are Defined Benefit, which provides a pension based on wages and length of service. Up to 2008 that was on a final salary basis, from 2008-2018 it was average salary and the current DBCBS just provides a lump sum to take with already accrued benefits.

In 2018 RM and CWU came to an agreement on pensions via the 4 Pillars agreement. Which was to offer a pension that gives an income for life similar to a DB scheme, rather than a pot of money(DC).
That is CDC!

CDC targets a pension of 1/80th of pensionable pay for each full year of membership and that aims to go up by inflation each year. But if the investments don't do as well as hoped, it could go down.
Every member will have a proportional slice of the cake based on their own wages and length of service.

It will also give a guaranteed lump lump of 3/80ths of pensionable pay, via the DB Lump Sum Scheme, for each year of membership, with annual bonuses.

Unless something changes, everyone will be put into CDC/DBLSS when it starts and all current schemes will stop.

People need to understand this new CDC scheme can actually see pensions go down whilst in payment.
If the pension scheme does well 1/80th and 3/80th I "think" are I think on a par with section B.
But will the garden be as rosy as the booklets we had on it paint, I don't think so.
But it has to be better than just a cash balance scheme in the long term, which once paid would see no yearly increase whatsoever.

Let’s put this to bed about the CDC pension having benefits on a par with Section B........ it will Never come close to rivalling Section B for the following reasons
1. The CDC is NOT a final salary scheme. The 1/80th pension will be 1/80th of that contributing years pensionable pay NOT your final salary pensionable pay. So at best the CDC scheme will be a watered down version of the career average scheme that was closed in 2018. Think back to when you started in RM and work out how much 1/80th of your pensionable pay was then and contrast that to 1/80th of what your pensionable pay is now.
2. Even these watered down benefits are not guaranteed. There is no certainty from one year to the next what level of yearly pension you will receive. People receiving their Section B pension have certainty. They know that their pension will rise by CPI each year and have the added certainty of knowing that the pension will not be reduced.

[RobertT]

Let’s put this to bed about the CDC pension having benefits on a par with Section B........ it will Never come close to rivalling Section B for the following reasons
1. The CDC is NOT a final salary scheme. The 1/80th pension will be 1/80th of that contributing years pensionable pay NOT your final salary pensionable pay. So at best the CDC scheme will be a watered down version of the career average scheme that was closed in 2018. Think back to when you started in RM and work out how much 1/80th of your pensionable pay was then and contrast that to 1/80th of what your pensionable pay is now.
2. Even these watered down benefits are not guaranteed. There is no certainty from one year to the next what level of yearly pension you will receive. People receiving their Section B pension have certainty. They know that their pension will rise by CPI each year and have the added certainty of knowing that the pension will not be reduced.

We're just going over well trodden ground here!

I don't think anyone thinks CDC is going to be based on final salary.
It's aim is clearly to provide a pension on an average basis, or effectively a pension for each year of employment, similar to the 2008-2018 CARE scheme.

If it does what it's supposed to do, it should provide similar benefits to the 2008-2018 element of section B. Which is a pension and lump sum.

I think by now every reader of this forum knows that CDC pensions can, and probably will, go down at some point. Personally I'd be very surprised if the modelling that says they would have only been reduced twice in the last 100 years, turns out to be the case going forward.

All the literature says CDC aims to provide a pension offering certain benefits. Most people can understand plain English!

[Woody Guthrie]

The modelling that was done based on the CDC scheme being in place over the last century suggested there would only be a reduction on two occasions, which was during the Great Depression in the 1930's.

The obvious problem with this modelling is that it always assumes the trustees do the right things at the right time or at least don't do the wrong things at the wrong time.

In the last 100 years you could have made or lost a fortune on investments depending on which way you jumped (or didn't) during periods of extreme fluctuations so their modelling is pretty much useless.

[RobertT]

The modelling that was done based on the CDC scheme being in place over the last century suggested there would only be a reduction on two occasions, which was during the Great Depression in the 1930's.

The obvious problem with this modelling is that it always assumes the trustees do the right things at the right time or at least don't do the wrong things at the wrong time.

In the last 100 years you could have made or lost a fortune on investments depending on which way you jumped (or didn't) during periods of extreme fluctuations so their modelling is pretty much useless.

Yes you're stating the obvious!

Past performance is no guide to future returns!