The government recently set out plans for introducing legislation to facilitate collective defined contribution (CDC); it is clearly committed to legislating for these schemes. However, if and when it happens, there is still a question mark around just how popular CDC will be with employers.
In CDC, members receive a pension income based on the value of their contributions to a collective fund, but that income level is not guaranteed. Benefits fluctuate so that their total value is equal to the total value of the scheme’s assets.
The potential impact of this is difficult to communicate to members. Unwise investment by CDC arrangements may result in cuts to pension increases or, worse still, pensions. Both employees and employers need to understand, and fully appreciate, this aspect of CDC; the Dutch have recently felt the pain on this front.
Communication issues aside, will employers move apace, if at all, to CDC? Some of the more paternalistic employers may see it as an attractive way of delivering a pension, as opposed to a defined contribution (DC) ‘pot’, at a predictable cost. Members may, in turn, find themselves better off invested in CDC rather than in individual DC.
Alternatively, some employers may question a move to a form of arrangement that is, to date, untested, and which the government feels compelled to spell out is money purchase in nature; no doubt this is to reassure employers that they will not be liable for any shortfall further down the line.
It may be that arguments about paternalistic approaches to pensions, which are not DB, and inter-generational fairness may yet win out with some employers. Others may simply decide that, viewed against traditional DC and auto-enrolment, some of the complication inherent in CDC is too much of a headache.
At the end of the day, and with CDC legislation still not on the horizon, it may all come just too late anyway for employers to show any real interest.
Graham Wrightson is pensions partner at Stephenson Harwood