The recent announcement from the Department of Work and Pensions (DWP), combined with the recent Pensions Regulator (TPR) consultation, has provided a real flavour for the expectations that will be set for Collective Defined Contribution pensions schemes (CDC). A CDC scheme is a new type of pension scheme into which employees and employers both pay a fixed rate of contributions. The contributions are invested in pooled assets. Members are paid an income from these pooled assets which will have variable increases i.e. their income can, on occasion, remain flat or even potentially decrease. From an employers’ perspective, they are attractive as there's no deficit contribution to be paid, as in a Defined Benefit (DB) pension schemes. From an employees' perspective, there will be no requirement to make complicated investment decisions like with Defined Contribution (DC) pension schemes; and although there is no promised benefit (like in DB) an employee is provided with an indicative income amount, which really helps with engagement and retirement planning. 

This all sounds positive, but there are still notable discussions underway on how likely it is that CDC will be utilised as a preferred scheme design for employers. Our analysis indicates that despite the fact that a compelling case can be made for CDC, there are still a number of areas of concern. Our analysis shows that for an established stable scheme, CDC can lead to better outcomes by increasing incomes, versus current DC options, such as a Trust or Master Trust for accumulation, combined with the various approaches to exercising the pensions freedoms, from drawdown, enhanced annuity purchase to optimal approaches of decumulation design. However, the complex task of scheme design is all-important and different designs can make the benefits of CDC less clear-cut for some members. Furthermore, achieving good member outcomes during the early years of establishing a scheme is likely to be more challenging than for an established scheme in a steady state.  

We also can’t overlook the level of investment needed to set up the scheme, the costs associated with meeting TPR’s ongoing expectations as set out in the draft code of practice and the ability to succeed is inextricably linked to time and maintaining a large, stable population of savers. Our analysis also suggests that the audience of employers that CDC schemes will realistically appeal to will be narrow.

What about CDC for decumulation only, could that be an option, for example, if it was introduced into a Master Trust?

When looking at decumulation, there is certainly scope for CDC to add value and improve outcomes by increasing incomes. When we consider the reasons why decumulation doesn’t work well for savers in the current workplace pension arena; this includes the places where they lose money, costs of exiting accumulation and entering decumulation, mismatched investment strategies, poor education leading to poor choices, lack of understanding of longevity, currently small pot sizes, and so on. If introduced with a strong communications wrapper, the ability to pool longevity and investments to deliver more income has strong appeal, perhaps as an at-retirement option. 

For this to be attractive to a Master Trust or pension provider, it feels like there are a few challenges to overcome. Firstly, CDC in decumulation would be another option presented to retirees when they are already overwhelmed with the range of different options and are struggling to make decisions. This might point towards a prioritisation of communication and digital engagement strategies for pension providers before introducing another complexity. The wrestle between guidance and advice, and perhaps finding the sweet spot of tailored guidance in the middle could be considered a priority area. If retirees are more informed when exercising their choices, you could see how CDC in decumulation could make a better business case on providers development priorities. 

Any at-retirement option should be delivered with careful two-way engagement and flexibility, managing changes to the health, wealth and family circumstances to those in retirement. The pension providers live to this challenge, and this feels, appropriately, like the current priority area of focus for the short to medium term.

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