The Work and Pensions Secretary Amber Rudd indicated today that Collective Defined Contribution (CDC) pension schemes would soon be introduced.
The schemes are alternatives to traditional DC and DB schemes, and Royal Mail are seeking to introduce the first scheme. They have been working on a concept for a CDC scheme with the Communication Workers’ Union.
This is a first in UK pensions, though the model is already popular in locations such as the Netherlands and Denmark. Given today’s news, it’s a great time to look at what CDC pensions are and what the legal position currently is.
What are CDC Schemes?
They are a type of “defined ambition” (DA) scheme that provides a regular income in retirement without drawdown or annuities. CDC is seen as a middle ground between DB and DC, with features that mitigate the risks of both approaches.
This is done by pooling members’ contributions and paying pensioners’ incomes from that fund. That requires that the scheme generates enough cashflow to keep pensions in payment, making it unsuitable for smaller schemes.
Unlike individual defined contribution schemes, there is no need for investment decisions by individual members. The larger pot also grants economies of scale for investments, and could drive access to better trustee advice.
The amounts members receive in retirement are based on investment performance – hence benefits being a target, not a promise. If investments perform better than expected, benefits rise, but under-performance leads to benefit cuts.
What’s the legal position?
The Government is poised to approve these pensions, after a consultation held between 6 November 2018 and 16 January 2019.
Whilst the Pensions Act 2015 does include provision for collective benefits, it does not contain a specific DA framework. Therefore a legislative framework will need to be put in place, as the consultation ruled out non-legislative options.
The consultation response states that primary legislation will be established as soon as parliamentary time allows.
Intellica’s View – from Garreth Hirons, Head of Pensions
“Choice and protection for consumers are never bad things, so if executed correctly, these schemes can only be a boon for the industry.
They’re not going to be for everyone, as the scale needs to be large enough to reap the benefits. Given the size of the contribution pool needed for a CDC scheme, large employers and master trusts are natural adopters.
As with all new initiatives, clarity of member communication will be key in driving engagement. Data quality, particularly around contributions and members’ target benefits, will be the key to smooth running and optimum investment.
There will need to be robust strategies to manage operational risks, but with the right approach, these schemes could thrive.
Like the rest of the industry, we’ll be watching Royal Mail’s progress with great interest and optimism.”