Collective defined contribution could dramatically uplift the final values enjoyed by UK pension savers, a parliamentary select committee has heard, but some experts still doubt its compatibility with pension freedoms and performance in market crashes.
The Work and Pensions Committee conducted an oral evidence session on CDC on Wednesday, as part of an inquiry launched in November 2017.
We don’t think it necessarily fits with freedom and choice
Nathan Long, Hargreaves Lansdown
A type of defined ambition scheme, CDC sets a target payout based on a mixed-risk, long-term investment plan. Unlike defined benefit schemes, the target represents an ambition of the scheme, and is not contractually guaranteed.
The committee heard arguments from Hilary Salt, actuarial director at First Actuarial, David Pitt-Watson, executive fellow at the London Business School, Sandeep Maudgil, partner at law firm Slaughter & May, and Nathan Long, senior pensions analyst at platform provider Hargreaves Lansdown.
Crashes mean pension cuts
The Pension Schemes Act 2015, as conceived by the coalition government, defined CDC as a distinct pension category. However, plans to introduce regulations needed to bring CDC into effect were shelved in October 2015.
Advocates of CDC have long used examples from countries such as the Netherlands and Denmark, where CDC is a common form of provision.
Conservative MP Nigel Mills asked the witness panel to explain how CDC schemes would function in the event of an economic crash.
David Pitt-Watson spoke of the Netherlands during the 2008 global recession. “There was an average of 2 per cent reductions of pensions in payment,” he said. “The most stressed pension fund brought it down by 6 per cent.”
Some doubt claim of one-third value increase
Speaking in favour of CDC, Pitt-Watson and Hilary Salt cited higher returns, a heightened ability to invest in longer-term, illiquid assets, and the exchangeability of cash in CDC schemes, which would allow for transfers.
During the session, Pitt-Watson referred to a range of studies that all indicated an increase of at least 33 per cent to the value of a pension under CDC, compared with the outcome of taking a DC pension and buying an annuity.
But Simon Harrington, senior public policy adviser at the Personal Investment Management & Financial Advice Association, said this analysis was overly reliant on the Dutch experience: “I think there is an absence of modelling on how CDC as conceived by the DWP in 2015 would apply to the UK.”
"I’m not sure I’m particularly comfortable with the idea of sitting and talking about the Dutch experience, and then attributing it back to the UK, and then arguing that if we were to move to CDC we’ll have a 30 per cent uplift in final pension pots,” he added.
Harrington is unimpressed by the current quality of the CDC debate. “There is an absence of clarity about what CDC is as legislated for, for the UK, and how it compares with other international examples, and then specifically what the benefits of CDC are as compared with the current system that we have,” he said.
Would CDC work with pension freedoms?
The committee pressed the panellists on savers’ ability to access pension freedoms with a CDC scheme. Maudgil said: “It’s borderline inconceivable that now you wouldn’t design it with an ability to transfer out.”
Long, however, expressed concerns over the compatibility of CDC with pension freedoms.
“We don’t think it necessarily fits with freedom and choice, and not just that, but also more modern working day practices,” he told the committee.
He predicted that those with larger benefit provision built up, along with those with lower life expectancy, would make greater use of their ability to transfer out of the scheme. This would subsequently weaken the shared pooling of risk in the scheme, he argued.
Could the self-employed participate in CDC?
During the session, Long raised the question of engaging part-time and self-employed workers.
Afterwards, he told Pensions Expert: “Ultimately, there’s no reason why you couldn’t build a CDC and encourage the self-employed to join it.”
“I think you would struggle to get people to buy into that, because I think it’s quite an opaque system where you’re given a pseudo-promise, which may or may not be kept,” he added.
MPs launch inquiry into CDC
The Work and Pensions Committee has begun an inquiry into CDC schemes, but experts remain unconvinced of European-style risk-sharing, highlighting intergenerational and moral hazard risks.
Con Keating, head of research at covenant insurer BrightonRock Group, disputed this point, and suggested CDC could be ideal for the self-employed.
“CDC does not need to be employer-sponsored,” he said. “We already have a CDC scheme for the self-employed in Holland.”
He added: “Far from being a problem for [the] gig economy and people who want to work longer, this is actually the flexible answer.”
