Will Collective Defined Contribution Schemes take off?

This article is part of
Guide to Workplace Pensions

"The Pension Schemes Bill currently going through Parliament addresses this concern by providing that the Pensions Regulator should not authorise a CDC scheme to operate unless it is satisfied that the scheme has adequate systems and processes for communicating with members.

"I expect that The Pensions Regulator will require schemes to make the non-guaranteed nature of CDC benefits explicit to members when they first join, and to remind them of that each year as part of the annual exercise of communicating to members what level of increase (or cut) is to be applied for their accrued benefits for that year.”

Kate Smith, pensions expert at Aegon agrees that communication could be an issue, and that there may be other potential downsides with regard to CDC schemes: “The industry is divided on whether CDC schemes will offer lower charges and greater certainty to savers or if they are just too complex to communicate to members, many of whom will be enrolled automatically.”

Fairness is a consideration issue too, according to Ms. Smith: “CDC schemes pool both investment and longevity risks across members but as we’ve seen from other countries, one generation can end up subsidising another.

"To reduce the risk of ‘intergenerational unfairness’, an individual’s target benefit needs to reflect what they are paying in year on year and also their age.

"Younger members should receive a higher target benefit than older members for the same contribution because of the longer period of investment before retirement.”

Henry Tapper, chief executive of AgeWage also sees potential issues with the intergenerational aspect of CDC schemes: “Young people may feel that they are subsidising the old.

"However, CDC schemes always require a degree of smoothing and with anything collective, there are always winners and losers. People will overall get more out of a CDC scheme because of economies of scale.”

The verdict

So, will they catch on?

Laura Stewart-Smith, workplace savings manager at Aviva does not expect them to become the most favoured option, as she explains: “We anticipate that the current DC regime will remain the workplace pension of choice for the vast majority of employers.”

Summing up, Maike Currie, director for workplace investing at Fidelity International says: “The jury is still out on how much of a success CDC schemes will be. It’s very early days, and the product has yet to be fully ratified through the Pension Schemes Bill.”

She adds: “CDC schemes will be definitely worth keeping an eye on as the year progresses."