Published by Danny Wilding on
Estimated reading time: 4 minutes
CDC promises a shared-risk approach to retirement benefit provision with advantages for employers and members. This sits in contrast with the current alternatives where risk is borne primarily by one party or the other. Danny Wilding asks: could this result in a flow of employers entering into the risk-sharing arena?
Private pension provision in the UK currently takes one of two polar extremes, with the majority of risks borne by either the sponsor (DB) or the individual member (DC):
The Government sought to introduce a middle ground (“Defined Ambition”) via the Pension Schemes Act 2015, but appetite was not sufficient and the drafted provisions were never brought into effect.
CDC seeks to address some of the perceived weaknesses of DB and DC, as well as taking some of the best aspects of each. In particular:
There is a broad spectrum of possible CDC scheme designs. Members could invest in a fund which pooled returns to reduce volatility (much like a “with-profits” fund), or the so-called “Dutch model” which targets a defined pension but with the ability to scale benefits according to the scheme’s funding position.
Whilst no such scheme currently exists in the UK, CDC arrangements are well-established in both the Netherlands and Denmark.
Example – based on the Dutch CDC model
Royal Mail announced in 2017 that it intended to close its DB scheme to future accrual from 31 March 2018. This led to discussions with the Communication Workers Union (CWU) on what retirement benefits would be offered for current and future employees instead.
Following mediation, the CWU and Royal Mail agreed in principle to pursue the introduction of a CDC scheme for all staff. The proposal was met positively by the Government, who recognised that it might now be worthwhile to consider legislation to allow a CDC scheme for such a large employer (the Royal Mail has around 150,000 employees)
The committee examined written evidence from 42 respondents, including Barnett Waddingham, and oral evidence from a number of individuals, asking for responses on:
In examining the evidence, the committee largely settled on the Dutch model as their preferred CDC approach, and their debate focussed on the intricacies of this design.
The WPC concluded that the introduction of CDC could represent an attractive alternative to DB schemes, and would not diminish individual freedom and choice. They recommended that:
The Government is expected to respond later this year, though remains likely to be preoccupied with ‘Brexit’ in the meantime.
Whether this then leads to a new era in workplace pension provisions is difficult to foresee – much will depend on whether the Royal Mail proposal is given the green light and, once up-and-running, whether it is viewed as a success. Nevertheless, although for many the option of shared risk comes too late (as the migration from DB to DC is well entrenched), others may well seize the opportunity to embrace the CDC revolution.
Anthony Johnson contributed to the writing of his blog post.