CDC might be a Goldilocks solution

Providers typically understand that different pension models are more suited to certain sectors than others. Providing employers with choice is therefore essential to ensuring their staff receive the best retirement outcomes.

The current pensions landscape is seen by many as offering a limited choice for employers. Defined Benefit (DB) models can present worrying levels of open-ended risk for many employers, while Defined Contribution (DC) retirement solutions can be confusing for savers to understand. Instead, the industry should be able to offer a wider range of solutions that allow employers to identify the model that best fits their workforce.

Many would welcome a Goldilocks solution – not too hot for employers, not too cold for savers – and for many, Collective Defined Contribution (CDC) might be just right.

How does CDC separate itself?

In a whole-of-life CDC scheme, contributions from employers and members are known and are pooled into a collective fund. This pooling can allow a scheme to generate greater returns for members than with individual DC pots, without the DB employer risks of a deficit emerging and the potential cost of insuring the benefits in the future. Albeit, in a CDC model the income is variable and not guaranteed, it is instead based on the investment performance and life expectancy experience of the scheme.

The introduction of CDC schemes in the UK, and the accompanying provision of an income for life alongside the significant potential benefits of pooling investment and life expectancy risks, should allow for CDC arrangements to grow into the pensions mainstream.

Who is CDC for?

Our view at TPT is that CDCs are a solution that employers want to see, and this conviction is largely driven by member interests. This is what is ushering legislation through parliament and will remain at the forefront of our minds as the CDC option becomes available to smaller employers. However, pension providers and decision-makers should not fall into the trap of seeing one pension model as automatically superior in all circumstances. Rather, choice for employers is key.

Different retirement solutions will be appropriate for employers within different sectors. It is our view that there is a white space within the pensions industry which CDC can help fill. An expanded occupational pension scheme market, which offers employers choices between DB, DC and CDC, will be a positive development for all and can, crucially, lead to better expected outcomes for a substantial number of individuals in retirement.

We are currently speaking to employers and unions to assess which sectors CDC fits with best, in terms of member and business profiles, and we will be engaging with more firms in the new year. One thing is certain; for some, CDC presents an unprecedented opportunity for a number of employers to affordably and sustainably improve member remuneration.

Who will bring CDC to market?

Some employers may find it challenging to launch their own CDC scheme. For the largest number of savers to benefit from CDC it will be necessary for solutions to offer consolidation, and thus be available to multiple employers. A multi-employer model can offer access to CDC for smaller employers by pooling their membership with other businesses, sharing costs between them and improving total returns.

Providers must be prepared for this. An in-depth understanding of the nuanced operational challenges of a multi-employer scheme structure will be crucial, as will sustained engagement with other providers and the Government on how this can be applied to CDC. At TPT, we are keen to engage with employers to explain CDC and gauge interest, and also maintain our dialogue with regulators to ensure that CDC comes to market oven-baked and fit for purpose.

Consumer duty will be another key consideration for providers, and regulators must ensure schemes operate at the high standards rightly expected by employers and members. From experience, I can say TPR’s requirements for the governance and operation of authorisation regimes significantly help in driving better outcomes and maintaining high standards.

If TPR and the DWP can ensure these high standards are maintained from the offset, allowing experienced master trusts to lead the way, then the future of CDC should be bright.