Steven Cameron, Pensions Director at Aegon says: “The concept of Collective Defined Contribution schemes has proved particularly controversial across the pensions industry, gathering strong support from some, and raising equally strong concerns with others. Today’s consultation will hopefully bring some rigour and logic to the debate, exploring where CDC might appeal to employers and benefit members, while also facing up to the many financial and communication challenges it poses.
“One of the key features of CDC is the inherent cross-subsidy across and between generations. Any employer considering offering a CDC scheme will need to be sure current and future employees know that younger generations may be required to bail out older generations in certain circumstances. There’s also a huge communication challenge in explaining to people that while they will be presented with a ‘target’ income, in practice, their pension benefits could go down as well as up even when they are in payment. These issues are compounded if CDC is used for automatic enrolment, where members will join by default, often with no engagement with the nature of the scheme.
“The CDC concept in other countries places restrictions on when and how benefits can be taken and on transferring into another scheme. Applying equivalent restrictions in the UK would conflict directly with the huge popularity of the UK’s pension freedoms.”
Rob Harper, Partner at Hymans Robertson: “There is a clear benefit from some form of pooling of risk for individuals in retirement and this consultation is a step in the right direction to provide a more reliable income for millions in employer pension schemes where the future looks uncertain. Compared to annuitisation and drawdown, CDC could potentially deliver this security in an alternative and pragmatic way by pooling risk for members, particularly in the later stages of their retirement. However, the advantages of CDC in the pre-retirement ‘saving’ phase compared to current DC schemes are much less clear.
“A couple of challenges will need to be addressed. These include establishing a suitable regulatory framework to ensure comprehensive governance processes and cost effective running of CDC schemes. Clear member communications are also essential to support member understanding of what CDC really means.
“CDC will not be a ‘one size fits all’ solution. The scale of assets and membership required to pool risk safely will limit this option to only the very largest schemes such as the Royal Mail or other arrangements that can achieve sufficient scale.”
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