The Pensions Policy Institute has published a report to clarify confusion around collective defined contribution. Kim Kaveh looks at how it could work in the UK.
Collective defined contribution (CDC) schemes will offer greater retirement income certainty than would be possible in defined contribution (DC) schemes, according to the Pensions Policy Institute (PPI).
In a report published today (29 November) - sponsored by Royal Mail and the Defined Contribution Investment Forum (DCIF) - the PPI was generally positive about CDC, but also noted the challenges and explored what the future could bring for collective forms of saving.
It follows the launch of the Department for Work and Pensions' (DWP) consultation to "shape future legislation" for CDC schemes in November. The DWP is seeking to gather industry views, after Royal Mail collectively agreed in principle to introduce the UK's first CDC scheme as soon as possible for 141,000 employees. The joint venture with its trade union, the Communication Workers Union (CWU), was announced earlier this year.
Benefits and hurdles
According to the report, CDC could offer the potential for higher retirement income compared to individual DC, more predictable retirement income than DC, greater certainty about costs and liabilities than defined benefit (DB), and potentially more efficient ways to offer employees a generous benefit than DC.
However, the PPI also highlighted the challenges, such as intergenerational fairness, and coherence with the existing pensions landscape, especially the pension freedoms which were introduced in 2015.
The report added there could be governance issues with maintaining a certain level of continuity and long-term perspective, with targets being set and revisited regularly. There could be communication challenges, and there will be a need to clearly communicate the targeted nature of benefits to members.
According to the report, it may be challenging to persuade employers to set up CDC arrangements, "given issues around communicating the changes to existing members who are likely to be moving from a DB arrangement".
It added that ‘policy overload' may discourage some employers from making the move to CDC, with substantial pensions policy changes having been implemented in recent years - in particular, automatic enrolment since 2012, and the freedoms.
However, it also said that it is possible that some employers may be waiting for CDC legislation to be established before expressing interest, "in order to see what the regulatory framework may entail before making any commitments".
UK CDC schemes do not necessarily have to be designed in the same way as overseas schemes, but they could learn from international experience, the report stated.
"The proposed Royal Mail scheme is anticipated to differ from those observed overseas in most ways other than essential characteristics (i.e. collective and defined contribution).
"Any further CDC schemes that are subsequently set up in the UK are likely to use the Royal Mail scheme as a template rather than looking at international scheme design, particularly as UK CDC legislation will be structured around enabling the Royal Mail scheme in the first instance."
In response to the report, Royal Mail Group chief governance and risk officer Jon Millidge said it has been clear throughout that there are a lot of lessons to learn from other countries' experience.
"We and our union, CWU, agreed that CDC is the right option for our employees. One of the key elements in developing our scheme has been to ensure decisions are made in the interests of all scheme members without bias to any particular group. Critical to this is transparency and communication - rightly, major themes in this project."
DCIF chairman Vivek Roy added that CDC is well and truly back on the agenda in the UK, thanks to Royal Mail's plans to develop a CDC scheme and the government's intention to facilitate these plans through legislation.
"As a group which is dedicated to promoting better understanding of UK DC pensions, we feel that CDC is a complex area. We hope that this report helps to clarify some of the confusion around CDC and set the scene for its consideration in the UK.
"In large part, confusion has arisen because CDC has evolved in different ways in different countries. In some cases, difficulties have arisen around how it is interpreted, creating intergenerational conflict. This reinforces the importance of clarity and consistency in how rules are set and implemented.
"While CDC cannot be identified as the right solution for everyone, from an investment standpoint a CDC structure could help to solve some of today's challenges. With the pressure removed to provide savers with daily pricing, CDC could facilitate better access to illiquid asset classes and longer-term investment horizons, providing better outcomes for retirees."
Last month, pensions minister Guy Opperman told Royal mail workers that large firms will follow the postal service's lead on introducing CDC if it works well for management and employees, at the launch of the DWP's consultation.
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