As of April this year a new protagonist appeared on the UK workplace pensions scene, when the Royal Mail collective pension plan was authorised. Collective defined contribution (CDC) schemes, part of pensions regimes in other countries, offer that middle ground many employers might find attractive, as they transition away from creating new defined benefit (DB) obligations. In essence, it is DC on the way in: regular, predictable contributions from employer and employee. But these funds are then pooled, invested collectively, and paid as a lifelong, but variable, income on the way out.
Pensions can often be a world of slow-moving consensus. Just look at auto-enrolment or pensions dashboards; most people see these as positive developments. CDC breaks this trend. Devotees claim enhanced outcomes thanks to the investment and longevity pooling, and crucially, a solution to the retirement decision-making conundrum that DC savers have faced since the pension freedoms. Vociferous critics cite intergenerational unfairness, expensive administration, and a lack of saver understanding as key risks.
So, could CDC work? In theory, yes: government seems convinced by the modelling different providers have put in front of them, with the proviso that there are sufficient members in the scheme. How many exactly that is, is open to debate. But irrespective of where that bar is placed, the key question as I see it, is how do you get enough members in the scheme?
CDC’s destiny, therefore, lies in the hands of employers. Few are large enough to go it alone like Royal Mail, with a single-employer scheme, that is why the Department for Work and Pensions (DWP) will publish its proposals for multi-employer and master trust CDC schemes in the coming weeks. It is important to stress, this is still early days; indeed, I suspect CDC has yet to crop up even in the margins of many employers’ pensions meetings. Critically though, CDC does appear to command consensus from policymakers: both Conservatives and Labour are supportive. So, if you are an employer, it will not be too long until it starts inching up your agenda, and the question is whether it will improve outcomes for members.
The Pensions and Lifetime Savings Association (PLSA) is keen to explore the potential CDC has to play in DC accumulation, DC decumulation, and as with Royal Mail, in DB. We will be working with our members, and with government, on this issue in the coming months.
Ruari Grant is policy lead–DC, at the Pensions and Lifetime Savings Association (PLSA)
