Is CDC an unnecessary policy change when effort would be better spent on ensuring increasing contribution levels, better communications and investment strategies? Charlotte Moore surveys the landscape.
Royal Mail’s agreement with the Communications Workers’ Union to work towards introducing a collective defined contribution (CDC) scheme is the first step towards a defined ambition pension arrangement.
The appeal of a CDC pension scheme is that it appears to be a half-way house between the current systems. It could solve some of the problems of defined contribution (DC) pensions while not involving the same level of financial commitment from the sponsoring company as a defined benefit (DB) scheme.
There are distinct differences to a DC scheme. Each member does not have an assigned savings pot – instead the assets of several members are grouped together to form a collective. Nor is CDC a replacement for final salary schemes.
Damon Hopkins, associate director at P-Solve, says: “Unlike defined benefit, CDC does not provide a guaranteed retirement benefit: it’s a target income, which is subject to the performance of the investments.”
This retirement income target could create considerable confusion for members. Steven Scott, consulting actuary at Xafinity Punter Southall, says: “CDC describes those benefits in similar terms as to those used by a defined benefit scheme but with caveats provided in the small print.”
The language used to describe the caveat is opaque. “The text says: ‘The revaluation might not apply at the promised rate,’ which is a difficult concept to grasp,” Scott says.
This could create future problems. “There is a danger that members will not understand what benefits they are getting until they retire,” Scott says.
IN CDC WE TRUST
The recent furore caused by the increase in the state pension age for women and the resultant Women Against State Pension Inequality (WASPI) campaign, has shown how important it is to communicate future pension rights clearly.
Scott says: “My concern is that if this system is adopted on a wide scale, there could be a similar crisis in 40 years when people start retiring.”
This ‘neither fish nor fowl’ characteristic of CDC could be a significant stumbling block. Under a defined benefit scheme, the guaranteed salary means members do not mind its collective nature and their consequent lack of control.
Conversely, while a DC scheme does not provide guarantees, members can monitor the size of their individual pot and add to it directly through greater contributions.
“For this alternative system to work, members have to trust it,” Hopkins says. And it is the trust of the whole workforce which must be garnered, because CDC only works if there is full participation.
