Collective Defined Contribution (CDC) pension schemes are a new –
to Britain at least – type of retirement saving plan with the
potential to address some of the concerns that policy makers and
the public have about the current pension “offer”. They are
commonplace in the Netherlands, Canada and Denmark but are
not yet allowed in the UK. Could CDCs be an answer to the
retirement saving problem?
Also known as a form of “defined ambition” scheme, they differ
from Defined Benefit (DB) schemes in that you are not promised a
certain retirement income - although as we are seeing often, the
company sponsors of DB schemes are not always able to keep those
promises. A CDC scheme instead has a target or “ambition” amount
it will pay out, based on a long term, mixed risk investment
plan. CDCs aim to pay out an adequate level of
index-linked pension for life but this is an ambition rather than
a contractual guarantee. They have the scope to redefine the
benefits they offer if circumstances - like adverse economic
conditions - require.
CDC differs from the traditional Defined Contribution (DC)
schemes that are largely replacing DB schemes in that it does not
produce an individual “pension pot”, which you then have to
decide how best to use for your retirement, but invests your
savings in a larger “collective” pot, and then provides an income
to you during your retirement. Thus, CDC schemes take the big
central decision of pension freedoms out of retirement planning,
and also much of the risk. In the Budget this week the
Chancellor announced plans to “unlock” investment in UK
infrastructure through longer term investment in “scale-up”,
innovative business: CDCs have been identified as a potential
source of this type of investment.
The Committee is launching a new inquiry into merits of this
idea, the role that ‘defined ambition’ CDC schemes could
play in the pension landscape, the potential benefits
to savers and the wider economy, and the legislative and
regulatory framework that would be required to make it work.
The Committee’s ongoing inquiry into pension freedoms has
highlighted the general level of mistrust and disengagement with
pension plans, and it is well known that policy makers are keenly
looking for ways to get people to plan and save much more for
their retirement.
Advocates of CDC schemes argue that
they provide greater assurance of retirement
income and more efficient pooling of costs and risks among
members than traditional DC, but do not impose the
burden of underwriting an onerous pension promise on
employers. Studies by the RSA and Aon
Hewitt estimate that CDC could have delivered 33%
better pension outcomes than traditional DC over the
past half-century.
Detractors argue that CDC may further fragment the pension
landscape, suffer from lack of demand, and run counter to the
trend towards greater individual freedom and choice in pensions.
The Pension Schemes Act 2015 created by the 2010-15 Coalition
Government defined “shared risk/defined ambition” or CDC as a
distinct pension category. However, regulations under the Act to
bring them into effect have not yet been introduced. In October
2015, the Government announced the plans would be shelved
indefinitely so as not to distract
from other major reforms such as
auto-enrolment and pension freedoms.
Rt Hon MP, Chair of the Committee,
said “What the Select Committee is aiming for is to
retain some of the best features of company schemes in a
different age when employers are no longer willing or able to
sustain the burden of final salary promises to employees, who
could instead club together and pool the risk themselves.”
The Committee invites evidence from any interested
parties on any or all of the following questions:
Benefits to savers and the wider
economy:
Would CDC deliver tangible benefits to savers compared
with other models?
How would a continental-style collective approach work
alongside individual freedom and choice?
Does this risk creating extra complexity and confusion?
Would savers understand and trust the
income ‘ambition’ offered by CDC?
Converting DB schemes to CDC:
Could seriously underfunded DB pension schemes be resolved by
changing their pension contract to CDC, along Dutch lines?
How would this be regulated and how would the loss of DB pension
promises to scheme members be addressed?
Regulation, governance and industry
issues:
How would CDCs be regulated?
Is there appetite among employers and the UK pension industry to
deliver CDC?
Would CDC funds have a clearer view towards investing for the
long term?
You can find full details, and submit your evidence,
here: Collective defined
contribution pension schemes inquiry
