Is collective defined contribution here to stay?
The rules for multi-employer CDC - or collective defined contribution - are set to be finalised next month. Will it take the UK by storm?
Collective defined contribution, or CDC, is set to introduce more than just an extra tongue-twister to the existing DB-DC landscape of UK pension scheme system.
Last year Royal Mail became the first UK company to launch its own collective scheme and new regulation for multi-employer CDC is expected to be finalised later this month.
Promising a target pension for life, CDC is a DB-like proposition for members. By enabling investments to be pooled, it offers all the same benefits of scale and long-term strategy.
It also takes decision-making away from the member, perfect for the average Joe who doesn’t want to “worry about what investment choices or lifestyle strategy or decumulation options… to pick”, according to Isio director Iain McLellan.
But on an employer’s balance sheet CDC more closely resembles DC, eliminating the surplus-deficit dynamic.
Professional trustee at IGG Tegs Harding said CDC could improve expected pension outcomes by around 40 per cent. And for companies not wanting to strike out alone, multi-employer CDC might be an attractive entry point.
But despite the name CDC isn’t simply DC with bells on, and implementation comes with a slew of challenges.
“It’s an entire operational change,” said Sophin Dapin, outsourced chief investment officer director at BlackRock.
Alongside all the same issues intrinsic to the pension system, such as the gender gap, CDC also throws up its own issues around fairness. When the pensions of people of different professions, income, gender and location are pooled together, there will be winners and losers, Harding warned.
Yet “just because it’s not straightforward doesn’t mean it’s not worth doing”, said Dapin.
And McLellan has an idea about how to kick-start implementation: “If the government thinks it’s a good idea, they should get Nest to do it.”