Single employer collective defined contribution schemes outperform an equivalent DC scheme regardless of economic conditions, the Pensions Policy Institute has said, and multi‐employer outperforms single employer CDC. A consultation on multi-employer CDC closes on Tuesday, with the pensions industry welcoming the new regulations, though some have said extra safeguards are needed.

For its latest briefing note comparing the performance of DC and different forms of CDC,  the PPI used a model developed by King’s College London, where the single employer model takes scheme design elements from Royal Mail’s CDC scheme, while the multi‐employer model is based on input from industry experts. 

Based on this model, the PPI found a single employer CDC scheme outperforms an equivalent DC scheme regardless of economic conditions, but to varying degrees. Single employer CDC comes with a generational cross-subsidy effect, comparable to that in defined benefit schemes, it observed, whereby later generations subsidise the earliest generations in the scheme.

The research also concluded that a multi‐employer CDC scheme outperforms a single employer scheme and offers a higher retirement benefit, “owing to different operating principles”. 

Multi-employer schemes come with an extra challenge, as employee populations might differ in terms of life expectancy. This could mean demographic groups with lower life expectancy could end up subsidising groups with lower mortality. The PPI proposes this could be addressed by creating multiple sections within the scheme, each with a homogeneous membership, or by underwriting each member and pricing benefits accordingly, though it notes that this might “not ensure fairness as reliably as keeping different memberships separate”. 

It modelled different schemes to understand the effects of cross-subsidy, and found that in a mixed-mortality scheme with no underwriting, all members receive a 90% mean replacement rate at retirement, but if these members were sectionalised by life expectancy, the high life expectancy and the low life expectancy groups would receive 80% and 100% respectively. In a joint scheme with underwriting, they receive 77% and 107% respectively. 

The findings come as the Department for Work and Pensions' consultation on regulations for multi-employer CDC closes on 19 November. The consultation was launched a day after the first single employer CDC scheme, for Royal Mail workers, started, and followed an initial consultation in January.

Actuaries, which have no role in pure DC, are supportive of the introduction of CDC, and hope the expansion of existing rules for single employer CDC to schemes for unconnected employers could give some impetus to this market, as no other employer apart from Royal Mail has so far come forward to set up its own CDC scheme.

The Institute and Faculty of Actuaries said current DC pension provision was in most cases not providing adequate solutions for all pension savers, with CDC offering a viable alternative.

Simon Eagle, who chairs the IFoA’s pensions CDC and collective benefit schemes working party, called the government proposals “a big step in the advancement of CDC schemes”.

Multi-employer schemes or master trusts will make it easier for employers to provide CDC pensions to their employees, he believes.

“The draft regulations on the whole provide what is needed, and the IFoA is engaging with DWP on a few specific areas to ensure the regulations are robust before finalised,” he said, adding that the IFoA hopes to also work with the DWP on using CDC as a decumulation option.

Pensions minister Emma Reynolds previously said the DWP will explore CDC as a retirement option, suggesting that decumulation-only CDC could be looked at in phase two of the Pensions Review.
   

 

Association of Consulting Actuaries chair Stewart Hastie said the ACA supports the arguments in favour of whole-life CDC and exploring post-retirement CDC. 

“The ACA encourages urgent continuation of DWP work with the pensions industry to facilitate this, particularly if government moves forward with requirements for trustees to provide decumulation solutions,” he said about the latter. 

However, the ACA said the regulations could be improved. Among others, it believes it is not appropriate for the scheme proprietor to be required to approve the viability report, noting that the regulations appear to permit a scheme proprietor to combine this role with acting as the scheme funder or scheme strategist for DC sections of the same trust. The ACA also wants clarity about the proprietor having to be based in the UK.  

The Pensions Administration Standards Association has called for extra scrutiny and safeguards around administration risks in CDC, highlighting the absence of any clear rules for multi-employer CDC schemes on what they need to do if there are mistakes in the records which might prevent the actuary conducting and approving the live running test.

One consultancy has warned the regulations are geared too much towards commercial schemes.

Hymans Robertson partner Kathryn Fleming said: "We are concerned... that, in this consultation, it doesn’t feel like enough consideration has been given to how industry-wide schemes... will work in practice."

Fleming added: “We’d also like to see the regulations follow a less prescriptive approach than proposed in the consultation.  Instead, we’d like to see a more principles-based approach which would give sufficient flexibility in the design of CDC schemes for innovation to flourish."

Some want to see more detail on the regulations so providers can get to work with building products. Matthew Arends, head of UK retirement policy at consultancy Aon, said: “Looking beyond these regulations, we ask for the swift extension of [the Pensions Regulator’s] CDC guidance - this is of equal importance. It is only with visibility of the entire regulatory regime that providers can judge whether they can introduce whole-life multi-employer CDC schemes to the masses - and in a way that is commercially viable.”