By Dale Critchley, Policy Manager, Aviva
Despite its name, CDC has more in common with Defined Benefit (DB) pensions than it does Defined Contribution. Good news for actuaries.
In simple terms, employees and employers pay in a fixed percentage of salary in return for a promise of a percentage of their pay in retirement. CDC uses actuarial models much like DB schemes to achieve this. But unlike DB schemes, the promise isn’t guaranteed, there’s no employer in the background ready to plug any funding gaps. If reality is out of step with the actuarial model, members’ benefits may need to be changed, including those of pensioners.
We responded to the consultation and, in a nutshell, we said we support the development of CDC schemes because they can deliver good outcomes for customers, but that there are a lot of factors that first need to be examined.
Pensions have a reputation for being complicated, and the underlying set up for a successful CDC is extremely complicated. To run one will require some serious actuarial muscle. It is no easy task to take employees aged from their late teens through to their late 60s and ensure there’s a fair outcome for all.
It’s not all down to actuaries of course. Investment management will require significant skill. The contributions collected from all the members of the scheme will have to be invested to meet the needs of all members. Younger savers will be looking for growth, whilst stability will be the priority for those in receipt of scheme pensions.
Throughout, there will be the element of cross-subsidy to be managed. Younger savers will be paying in money which in part will pay for the generation ahead of them, while hoping that the generation behind them will return the favour.
Older workers will do well out of CDC, especially those who are likely to spend many years in retirement. But to work effectively the scheme needs longevity, members need to see the benefit of a scheme pension based on a fixed rate of accrual, rather than a universal contribution rate, and they need to believe that the scheme will be around to deliver when they get to retirement age. Skilled actuaries will certainly be required.
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