Torsten Bell: We need to leave aside the cynicism and get on with the hard job of making this work in practice.
Challenges with implementing collective defined contribution (CDC) schemes can be overcome and the industry and policymakers must now come together to make it work in practice, the pension minister says.
Speaking at an event held at Aon's London office yesterday (22 October), Torsten Bell noted the government's announcement that it would lay regulations to allow unconnected multiple employer collective defined contribution schemes and also launch a consultation on policy for retirement CDC schemes today (23 October).
He also celebrated the work that Royal Mail had done on launching the UK's first CDC scheme last year and said he was "encouraged" by the number of people coming to him asking to make progress on multi-employer CDC schemes – as well as the number of providers and employers thinking about CDC and whether it is the right thing for them to do.
But he said setting up CDC was hard – and had a number of well-known challenges that would require work to overcome. Despite this, he said these challenges, if faced up to, could be overcome.
The minister said the conversation on CDC had come a long way over the past five years, but now was the time for the hard work to begin to make CDC work on a broader basis.
Bell said: "We are now in the phase where we need to leave aside the marketing and leave aside the cynicism and get on with the hard job of actually making this work in practice."
The minister added he believed CDC had an "really important" place in the future of UK pensions.
He said: "The job of the 2020s, when we think about our pensions world, is to put in place the finishing touches to the settlement that will take us through the rest of this century. We've rescued workplace pensions. We now need to make sure we've got a system that we are really confident will have trust, because it's delivering adequacy, it is protecting people against risks, and people are confident that it is being run in their interests.
"That is what we've got to get to. That is what we are doing right now with the Pension Investment Review, the Pension Schemes Bill, and the Pensions Commission, and I think CDC is a really important part of that task."
CDC Forum launches as CDC
The event also saw the launch of the CDC Forum as a community interest company – with the organisation becoming fully independent of The Royal Society of the Arts (RSA), the body that had originally germinated it.
Speaking at the event, CDC Forum co-chair David Pitt-Watson said that people wanted an income for life from the pension system – adding that this was something the DC system just wasn't designed to do.
Pitt-Watson said that, if the goal of a pension system is to provide the best lifetime income, then it is key to find a way to effectively share longevity risk, something he said was very expensive to do on an individual basis and would be much more effectively done under a framework such as CDC.
Indeed, he noted that, if you compared CDC with DC plus an annuity for the same costs, CDC would give members an outcome some 30% better.
But he said CDC was not easy and was "not a panacea" – and was a model that needed to be carefully regulated, set up and managed. Critically, he said, CDC required good communication throughout a member's journey so people know that what they're saving into is not a pension that is going to be guaranteed.
Pitt-Watson added that creating an effective CDC was "not in any one person's gift – noting CDC pensions would not create themselves because of "some magic invisible hand that will make them happen".
He said: "The market alone is not going to be able to do this. It's going to require partnership between government and industry. It's going to require company sponsors and employees. It's going to require pension providers as well as actuarial companies and legal oversight… all these interests, all this knowledge, need to be brought together for this to work."
Pitt-Watson said this was the reason the CDC Forum – which now has some thirteen members – had been created. He added it was now reaching out to other organisations, such as trade unions, regulators and professional bodies, to broaden the conversation further.
He said: "I believe that by our common endeavour, working together, we can make a fair and efficient lifetime pension available to millions more people, and that is a goal that I think is worth pursuing."
