The government is set to consult on expanding collective defined contribution schemes to non-associated employers, so where is the UK now with this ‘new’ form of providing pensions? Is enough being done to help bring CDC to the mass market? 

 

“There is a lot of confusion about what these arrangements are,” said Jessica Mosher, a policy analyst at the Paris-based forum of mostly developed countries, presenting the OECD Pensions Outlook 2022. They are complex, and there are many different flavours of CDC - they can play a role in accumulation or in payout only, ownership rights can be managed collectively like in Royal Mail’s version, or in individual accounts like tontines, while benefit formulas can resemble either defined benefit or DC schemes.  

 

Where exactly a country decides to come down about these aspects when introducing CDC always involves trade-offs, said Mosher.  

 

“These trade-offs need to be weighed in selecting the appropriate design,” she noted. 

 

Introducing CDC can be a long journey. There are multiple barriers to be overcome, both on the supply side - legislation having to be written and schemes being fully funded at outset to ensure existing members are treated fairly – and the demand side.  

 

“People are reluctant to hand over their life savings to have a small trickle of income, and to hand over control of the assets and not getting those back. On both sides there need to be more incentives in place to get these plans running," she argued. 

 

Mosher said there has to be independence and transparency about how the scheme’s assumptions and any benefit adjustments are arrived at, but perhaps the most crucial aspect is communication.  

 

“Members really need to understand that their benefits can indeed be reduced,” she said, and noted that where pension reductions become necessary, it can significantly damage trust in the system. 

 

In the UK, the CDC debate is often polarised. Speaking in a personal capacity on the same panel as Mosher, professional trustee Chris Parrott said: “In the UK, we don’t seem to have a sensible debate. It’s two extremes... It’s either a fantastic idea and it’s the future, or people are very against it. Can we please have a sensible debate.” 

 

 

However, not everyone feels that the CDC debate in the UK lacks constructive argument. Chintan Gandhi, head of CDC at consultancy Aon, said there is a “really good discussion” about the topic. 

 

He said there was interest in both whole of life and decumulation only CDC and even predicted that “we may see demand for CDC to become a default decumulation option”.  

 

There is currently no decumulation default in the UK system – the pension freedoms removed this – but the DWP published a call for evidence in June asking what support scheme members need “to help them make informed decisions about how to use their savings”, after MPs recommended that investment pathways like those in contract-based schemes should also be available in the trust-based environment. 

 

    

In October, Jo Gibson, who heads up defined contributions pensions policy at the DWP, said about decumulation defaults: “We need to look at it, it’s what people are asking for.”   

 

    

 

CDC has been coming for some time, and many insurers are beginning to think about it, said Michael Jones, a partner in law firm Eversheds Sutherland.  

 

The need for scale and deep pockets means “it has got to be an insurer” to offer CDC, he argued. “Very much relies on the insurers to push it through in terms of bandwidth and having group personal pensions or master trusts to be able to offer it,” he added.  

 

And although the DWP is currently focussing on trust-based schemes with CDC, Jones said there is “nothing to say you can’t offer it to the retail market” like any other product. 

 

For providers, CDC has the advantage that they gain certainty about when and how assets will be withdrawn from a collective pool, he said. The more predictable cash outflows are also what would allow CDC providers to invest in potentially higher-yielding illiquid assets, which is currently difficult to do in the drawdown phase. 

 

Jones sees the main application of CDC in the retirement phase. This phase is “being ignored or forgotten”, he opined, despite lasting almost as long as accumulation. CDC could help to bridge the gap between a savings phase based on inertia, and a drawdown phase that demands knowledge about investments and longevity. 

 

But with the UK likely plumping for decumulation, business considerations play a big part, too. 

 

“One massive issue is the cost” up front of setting up a whole of life solution, which risks putting employers off, he said.  

 

The fact that there are no assets means actuarial projections are more complex and expensive, while a retirement solution would mean simpler modelling, he said. 

 

Authorisation is another barrier. “Anyone who’s been through master trust authorisation knows it’s a lot more expensive than anyone first predicts,” Jones remarked.  

 

 

How soon the first mass market CDC scheme will be available is not clear. Aon predicts this could be the case from 2024. 

 

Jones said the DWP is not offering much time to discuss CDC with industry. He called on the government “not to bury its head in the sand and get the next phase of CDC properly set up” so this solution can be accessed by the next generation. 

 

“It’s so well documented that we are going to have a generational issue with the amount of retirement savings,” he said. “If the government is happy that CDC is a viable solution, they should be enabling access for people other than Royal Mail.”