Collective defined contribution (CDC) schemes have been in the news a lot recently, although the idea of them being used in the UK has been around since the Department for Work and Pensions (DWP) started investigating ‘defined ambition’ pensions in 2012.
In essence, a CDC scheme would be a different way to run a pension scheme that falls some way between the guaranteed pensions offered by a traditional defined benefit (DB) scheme, and the less certain but more flexible outcomes from a defined contribution (DC) one.
The main difference between the various types of scheme is in who bears the risk. In a DB scheme, the employer or scheme sponsor bears most of the risk. In a DCone, it is the individual member. But in a CDC scheme, the risks are shared across its members, meaning individual members can benefit from the risks being pooled.
There have been many studies that have highlighted the potential for better and more certain outcomes for members from CDC compared to DC, but there have also been concerns raised over potential complexity, inflexibility and lack of transparency. As with all types of pension schemes, there are trade-offs involved.
One of the main drawbacks has been a lack of demand. There have not been any employers interested enough in CDC schemes to offer one to employees. As a result, the DWP has not yet laid the regulations to allow CDC to be operated in the UK, even though the concept passed through legislation in 2015.
Now Royal Mail, after discussions between the employer and the unions, is keen to implement a CDC scheme. If it is created, interest is likely to increase further. While CDC may not be the only type of pension in future, it looks increasingly likely that it will become part of the landscape.
Chris Curry is director at the Pensions Policy Institute (PPI)