The report, ‘Making CDC work in the UK: Collective Defined Contribution pensions with investment choice’, funded by the Nuffield Foundation, said that a ‘Collective Drawdown’ CDC pension design may also offer members more choice on their investment strategy, helping to meet their risk and ethical preferences, with improved risk management potentially enabling greater investment in productive assets and in turn contribute to the wider UK economy.
The investigation advised Collective Drawdown could also provide a simpler scheme for members to understand, make it easier to calculate transfer values and be more straightforward to regulate. However, it also noted various issues which would need to be resolved to implement the scheme design, which would necessitate new regulation and potential legislation, in addition to plans announced by the government in October.
The report further found that current, wider CDC schemes can outperform both Defined Benefit (DB) and DC options and cost less than currently available means of risk sharing. In addition, the report determined that CDC schemes could benefit members by sharing longevity risk, concluding that it is impossible to improve all member outcomes by sharing investment risk.
The research additionally concluded mispricing in a CDC scheme could reduce efficiency; effective risk management and member communications are critical for any collective pension design; and mimicking a DB structure in a CDC scheme generates inter-age cross-subsidies.
CDC schemes are a new approach to pensions which aim to allow members to achieve better pension outcomes through risk-sharing, but without relying on an employer guarantee. Only one UK CDC scheme exists at present, although some schemes, employers, and providers are investigating the potential of further single-employer designs.
Timothy Pike, Head of Modelling at the PPI and Co-Investigator for the project, commented: “We are incredibly proud of the analysis the PPI has contributed to this timely report, helping to close the knowledge gap on how CDC schemes can work in the UK. As the sector gears up for a future with a potentially larger role for CDC schemes, it is vital we understand how we can optimise retirement saving outcomes. I am immensely grateful to the Nuffield Foundation for funding this critical piece of research, and to Kings College London for selecting us to work with them.”
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