CDC schemes are widely used in the Netherlands, Denmark and certain parts of Canada. Provided the UK learns from the experience of these countries, it might be able to offer CDC schemes in a way that works in the UK environment.
The Dutch pension system consists of three pillars: the state pension, occupational pension schemes and individual pension products. CDC schemes fall under the second pillar of the Dutch system.
Under Dutch law, the sponsoring company and pension fund are strictly separated, with the scheme usually being administered by a third party insurance company or professional pension fund.
In the Netherlands, pension schemes are mandatory for an entire sector or profession. More than 90 per cent of employed workers have a pension scheme with their employer. The mandatory nature of industry-wide pension schemes means it can benefit from economies of scale and efficiently manage marketing and administrative costs. Mandatory participation also allows for risk-sharing between different cohorts, reducing the likelihood of the scheme being underfunded.
The Dutch CDC model was criticised when the pressure on scheme funding associated with the low interest rates consequential on the 2008 financial crisis led to benefits being reduced and to the structure of the schemes being reviewed. It is worth noting, though, that despite the dire conditions after the financial crisis, the weighted average cut in benefits was only 1.9 per cent, according to the Pensions Policy Institute. Many schemes have subsequently made up the cut in benefits.
The primary learning from the Netherlands is, therefore, one of communication. Dutch CDC-style schemes had come to be presented to members as “defined benefit”, which led to expectations that pensions were guaranteed, with consequential disappointment when pensions were reduced.
A rather more subtle point comes from those schemes that did not reduce benefits, even though this would have been justified. This can lead to accusations of inter-generational unfairness, with pensions in payment being protected at the cost of benefits for younger members.
In comparison, in Canada, pension rules are established by the individual provinces and by the federal government for the Northwest Territories, Nunavut and Yukon, and federally regulated industries.
As a result, it is at the discretion of each province’s government whether they wish to provide a legislative and regulatory framework for these plans. Although several territories have implemented target benefit plans, currently, only the province of New Brunswick has a CDC-equivalent scheme, known as shared-risk pension plans (SRPPs).
