This year may finally see the first collective defined contribution (CDC) pension go live in the UK, but doubts remain over how the structure could benefit the wider pension landscape.
The concept has support from within parliament – Conservative MP Thérèse Coffey even suggested that politicians “lead by example” and convert their own £790m scheme to a CDC arrangement.
“I am conscious that the taxpayer pays for our contributions through the government and so on,” Coffey said during a debate at the start of this month, “and we have an uncertain career path by becoming members of parliament, but where something is good enough for others and we are creating legislation for it, we should consider leading by example and giving some impetus to that new legislative vehicle.”
As bold a suggestion as this is, industry commentators are not convinced this would encourage greater adoption of the new model.
Tom McPhail, director of public affairs at Edinburgh-based consultancy The Lang Cat, says: “MPs switching across would certainly help send a positive message to other employers, but it might not be enough on its own.
“One of the biggest challenges with CDC is getting employers to sign up to it, to switch from whatever scheme they’re sponsoring at present.”
Early movers and legislative delays
It is early days for the CDC movement. There is currently only one authorised scheme in the UK – the Royal Mail Collective Pension Plan. This was authorised by the Pensions Regulator (TPR) in April 2023 and is expected to begin operations by the end of 2024.
However, as the legislation to allow this was developed to cater for the Royal Mail, the CDC model is still out of reach for many employers.
This is despite research from Willis Towers Watson indicating that a CDC arrangement could be cost effective for schemes with at least 5,000 members.
Simon Eagle, senior director at Willis Towers Watson, explains: “For CDC to really take off we need multi-employer schemes and master trusts – those kinds of pension providers make it easier for employers to access CDC.”
Citing separate research that 30% of retirees would favour a CDC option in retirement, Chintan Gandhi, partner and CDC specialist at Aon also wants a more complete regulatory framework in place.
In particular, he says the absence of regulations for multi-employer whole-life CDC schemes is glaring.
“These are now long overdue after the initial consultation on the blueprint for these schemes was published as long ago as 30 January 2023,” Gandhi says.
“Just as important… is TPR’s extended CDC guidance. When published, this will be the big test of whether providers – including existing defined contribution (DC) master trusts – can introduce multi-employer whole-life CDC schemes in a commercially viable way.”
The answer to UK pensions’ problem?
Despite these barriers, there is significant interest in the CDC model among employers.
Derek Benstead, senior consultant at First Actuarial, sees this first hand: “There used to be around six million active members of defined benefit (DB) schemes in the private sector, there are now fewer than one million.
“If the advent of CDC results in an increase in the number of private sector workers having access to a pension scheme, as opposed to a DC investment pot, this would be a good thing.”
CDC affords greater flexibility around asset allocation which, potentially, could lead to higher returns and boost retirement benefits. Aon’s Gandhi points to research that forecasts CDC is expected to deliver, on average, 30% higher outcomes than a typical DC strategy.
“By pooling risk and targeting, but not guaranteeing, to provide increases to pensions in line with inflation, CDC schemes can hold more return-seeking investments, and over a longer period,” explains Gandhi. “This means whole-life CDC has the potential to deliver greater efficiency from existing company and employee DC contributions.”
However, these forecasts are just that – and McPhail, for one, is sceptical: “Proponents argue CDC can deliver better returns, though this seems largely ‘case unproven’ so far.”
CDC in 2024
The first CDC may not yet be live, but 2024 could be a busy year for the new structure.
“We are expecting a further government consultation later this year on allowing multi-employer and master trust schemes, but specifically for the whole-of-life form of CDC,” says Willis Towers Watson’s Eagle.
“I hope we see regulations in force from some point next year, which would then allow multi-employer [schemes] and master trusts to finish their designs. The earliest possible could be opening in 2026 but that’s if we move quickly in the pension world.”
Fortunately, the CDC model’s rare cross-party support (for a pension policy) means July’s general election is not likely to derail progress.
Indeed, in a parliamentary debate in February the then-Labour shadow pensions minister Gill Furniss expressed her party’s support for the CDC concept, adding: “We support efforts to get CDC schemes off the ground as soon as possible…
“I know that many in the pension sector are eagerly awaiting the launch of the Royal Mail scheme; I hope that that is now in the very near future, and I look forward to seeing its progress.”
First Actuarial’s Benstead concludes: “There is union support for CDC as a better alternative to DC, with an important qualification that unions would not want to see DB undermined by CDC.
“I expect the work on CDC to continue, whoever is in charge after the election.”
Further reading
First Actuarial’s Hilary Salt on her CDC ‘legacy’ (8 April 2024)
Why TPT is exploring CDC (8 November 2023)
