CDC schemes move from abstract idea to practical reality

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The work and pensions select committee has called on the government to enable the creation of collective defined contribution (CDC) schemes in the UK.

In response to the Royal Mail and Communication Workers Union (CWU) proposal, the report considered the benefits, limitations and legislative changes needed to implement CDC schemes.

‘The government is rightly seeking to support the Royal Mail agreement and to future-proof its legislation to enable the introduction of CDC schemes at other companies. In doing so, it is opening the door for CDC to move from abstract idea to practical reality,' the committee said.

With defined benefit (DB) schemes in decline and members not saving enough into auto-enrolled defined contribution schemes, CDC schemes have been positioned as rearing sustained investment returns, benefiting employers and the wider economy.

To make this type of scheme legally possible, the committee recommended the government uses its existing powers under section 32 of the Pensions Act 2011 to amend the statutory definition of money purchase benefits to incorporate collective benefits. As a result, employers would not be held liable for funding scheme deficits.

The report added that, as CDC can keep funds collectively invested, the removal of the need to purchase separate retirement income products may also reduce cost leakage to third-party advisers and providers.

While there has been speculation as to whether CDC schemes could be integrated into the pensions space post-pension freedoms, the CWU told the select committee there is ‘ample scope’ to incorporate flexibility.

It has been noted transfer values for CDC members could be calculated and it is conceivable savers also seeking a regular income could transfer into a CDC scheme.

‘Rather than being incompatible with the pension freedoms, CDC is arguably completely consistent with it – it is an attractive choice for people seeking a regular pension in a low-interest era in which DB pensions are in decline,’ the report said.

The government has now indicated it will seek to enable CDC schemes to be introduced by Royal Mail into the UK pensions landscape. The committee has supported this and has urged the development of a swift timetable in response to its report.

Work and pensions committee chair Frank Field said: ‘The idea of a ‘‘new Beveridge’’ has been overused and under-delivered during most of the welfare state’s life. But the report published by the select committee offers that opportunity for pensions: how to combine decades of individual pension ownership and provision with collective security. The report centres on CDC schemes specifically in relation to the breakthrough at Royal Mail.’

Whil this type of scheme may be the right approach for Royal Mail, Association of British Insurers head of retirement policy Rob Yuille indicated that 'it is unclear what benefit there would be in making them [CDC schemes] widely available.'

He said that establishing the rules for CDC schemes would be a 'major undertaking', especially 'at a time when government already has a large number of policy commitments that it should be prioritising, and would add yet more complexity for consumers.'