CDC could be 'transformative' but 'many complexities' exist

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https://www.professionalpensions.com/ne ... ties-exist

Collective defined contribution (CDC) schemes could be “transformative”, but “many complexities” around the model remain, according to industry experts.

CDC schemes officially opened for applications yesterday (1 August) in an effort to introduce an alternative to defined benefit (DB) and defined contribution (DC) pensions in the UK.

The schemes allow savers to pool money into a single fund which pays an annual income. The first company expected to open a CDC scheme is Royal Mail, which has been working on the proposals since 2018.


The Department for Work and Pensions has said CDC can provide improved retirement returns for savers and has the benefit of more "predictable" costs for employers.

Aegon pensions director Steven Cameron said the schemes are "designed to give members more assurances of the benefits they will receive compared to DC schemes where members bear all the investment risks, while avoiding the guarantees of DB schemes which place a highly costly unlimited funding liability on employers".

He added: "An underlying concept is members share risks of investments outperforming or underperforming and also of some members living much longer, so receiving their pension in retirement, longer than others."

However, Cameron warned there are "many complexities" associated with CDC schemes and "it will be important that members understand these, including that ‘target' benefits are not guaranteed and can go down as well as up even once their retirement income is being paid".

"Rightly, new legislation sets very stringent rules for the running of such schemes, to make sure they are designed fairly, run on a financially sound basis and provide good member outcomes," he explained. "They must also be equipped to explain the many complexities to members. This is crucial as many of the millions who are automatically enrolled may not currently ‘engage' with the details of their scheme. Initially, this will make them viable only for the very largest of employers."

Plans for CDC to be extended to multi-employer schemes will raise new challenges around financial management and fairness, Cameron added.

"But, if workable, this may open the door to a new form of workplace pension for a wider range of employers and their employees," he concluded.

Lane Clark & Peacock partner and Association of Consulting Actuaries chair Steven Taylor argued CDC schemes have the potential to be "transformative for UK pensions".

"There will be challenges in scheme design and in member communications," he warned. "However, especially in these current times of high inflation, CDCs offer the potential to help a new generation of employees target good quality incomes in retirement that are a step up from the DC schemes that are currently typical in the private sector".

"We know many large employers are watching this space with interest and will be keen to chart the successes of the first schemes that are expected to emerge in the next year."

Hymans Robertson partner Kathryn Fleming said CDC "represents a new opportunity for employers" where DB or DC "just does not deliver on the desired pension outcomes that they have for their employees, or the business risks that they face, with CDC offering a good middle ground".

"Like all innovations, there will be learnings along the way, in particular with how benefits are valued and adjusted and the fundamental ability to communicate effectively with members," she said.

"CDC will be intensive to deliver, but we do look forward to seeing it take its next step forward."

The comments come after Aon partner and head of CDC Chintan Gandhi suggested CDC is "the biggest innovation for UK pensions in a generation".

He added: "When commercial master trusts are able to offer decumulation-only CDC solutions, there is the prospect of anyone - in whatever way they have built their pensions pot - having the option to buy a CDC pension at retirement with some or all of those savings. This would be a huge change in the UK pensions landscape.

"However, further expansion of the CDC regulations introduced will be needed to unlock these possibilities. The government has committed to consulting by the end of this year on the principles on which they intend to regulate, followed by the final regulations."

Barnett Waddingham partner Simon Taylor said he "wouldn't expect to see a deluge" of schemes lining up for authorisation.

"In fact, we would be surprised if there was more than one in the first instance," he stated. "It's possible that Royal Mail will be the only scheme to begin with, and we are looking forward to them ploughing ahead and making a success of it.

"As for everyone else, they will be in the wait-and-see mode before making any forward moves. It is likely that CDC won't really get the traction until master trusts are also in a position to offer it."