PENSIONS
What’s all the fuss about CDCs?
Henry Tapper, chief executive officer for AgeWage explains what collective defined contribution (CDC) schemes are, and why they’re so controversial R eaders may well ask why so much attention has been paid to a new type of pension called the CDC. It’s highly controversial but despite all the articles, seminars and
workers to older workers. Those who support the idea of CDC say that it’s simply reverting to the principles that made DB schemes so popular, and that the problems such schemes have had this century are because they’ve moved away from the principle of mutuality that underpins CDC. This argument is rather abstract so long as no CDC schemes are in place. Royal Mail wants to use CDC to provide postal workers with a pension without bankrupting the employer and was forged from a bitter dispute between unions and management. Similar disputes could find a CDC resolution, for instance, for university employees in the Universities Superannuation Scheme pension scheme, and possibly railway workers, whose industrial action is partly about pensions. CDC looks as if it could offer a third way for staff used to being offered a DB a similar benefit, without guarantees. What could CDC schemes be an alternative to? Another way of looking at CDC is as an alternative way of getting paid a pension from your workplace savings in a defined contribution scheme. Annuities are known for paying relatively low levels of income, because the income payable must be guaranteed by an insurer. The alternative way of getting paid an income from your pension pot is through drawdown where you instruct your pension provider to pay you a fixed amount or a percentage of your pot into the future. It’s up to you to make sure that money lasts as long as you do. CDCs could be set up as an alternative to an annuity or to drawdown and pay a lifetime income at a better rate than an annuity. People choosing this option would
have to accept that, because the CDC fund is simply the collective pots of thousands of savers, it can only pay out as much as the pot can sustain over time. So, there’s a new risk here, which is that the income promised may have to be reduced if the fund doesn’t grow as planned. The same issues arise when CDC is used as a ‘decumulation only’ plan. Those who argue for guarantees argue that it’s mis-selling a high rate of income without proper insurance. Those who advocate pensions freedom see CDC as a fudge which ‘disengages’ savers from their responsibility to manage their later life finances individually. Will CDC schemes prove popular? Research from Nest and consultancies such as Aon and Willis Towers Watson suggests that CDC is likely to be popular with members of workplace pensions who are prepared to take some risk of their pension income rising and falling with the markets, but who aren’t happy to manage their own pension drawdown. Aon estimate that over 60% of savers they polled described a CDC style pension when asked what they wanted. The research can be located here: http:// ow.ly/7F7z30sonAi. The success of CDC will depend on the capacity of the pension industry to package the idea so that people understand and trust it. So far, it has been arguing about CDC with itself. But with CDC applications beginning in August and the first scheme opening in early 2023, the argument will need to be had with the people whose pensions might get paid by CDC. What do you think? n
legislation, not a single CDC scheme has been set up yet. It’s unlikely this will happen until well into next year, when Royal Mail looks set to launch a scheme for 140,000 postal workers. This article aims to explain what CDC is, why it’s so controversial and whether it could become a central part of the UK pensions ecosystem. Hopefully, it will excite you to think about your own workplace pension and whether some of the features of a CDC scheme would be helpful to your staff. The first thing to say about CDC schemes is that they set out to provide those who join one with a wage in retirement which lasts as long as they do. This is something that workplace pensions haven’t been able to offer since the demise of private sector defined benefit (DB) schemes. The second thing to say is that CDC doesn’t rely on an insurance company standing behind the scheme – if things go wrong, the only insurance the scheme can call on is the ‘collective’. This is What should you know about CDC schemes? the combined fund created by defined contributions paid over time. This is what makes CDC so controversial as it introduces an element of risk-sharing that’s between members rather than with an insurance company or an employer. Critics of this approach say it encourages risk-taking rather than risk-sharing and that such schemes are likely to rely on ‘inter-generational transfers’ from younger
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| Professional in Payroll, Pensions and Reward |
Issue 83 | September 2022
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