CDCs could be the new annuities, say regulators

CDCs could be the new annuities, say regulators

Collective defined contribution schemes could become a popular alternative to annuities if their risks can be contained, according to the Pensions Regulator and Financial Conduct Authority. 

Speaking at a Work and Pensions Committee hearing this morning, David Fairs, executive director at The Pensions Regulator, said CDC schemes had many advantages over defined contribution schemes and in future could be rolled out to multiple employers and master trusts, hence become the new pension product of choice for many.

CDCs are a half-way house between defined benefit and defined contribution schemes. They allow savers to pool their money into a single fund which pays annual pension income. Pension increases vary depending on the funding level, but the schemes are expected to yield higher pensions for the members than traditional DC annuities.

So far legislation has been established to facilitate CDC schemes for the Royal Mail and other single employers who want to introduce the schemes but not multi-employers.

The committee asked the two regulators if it was a realistic possibility, and what additional risks there would be, if they were to be provided to multiple employers by master trusts. 

David Fairs, executive director at The Pensions Regulator, said: “CDC schemes have a great advantage that they pull that longevity risk and they give you a predictable amount of pension for as long as you live. That's one advantage.

"The other is that the investment decisions that are made, particularly in the retirement phase, are being made by trustees who potentially are more open to risk than individuals.

“CDC does deal with those things. The legislation that is in place is there to facilitate CDC schemes for single employers. We then need to look at the steps that we need to take for multi employers, learning from our experience of having authorised single employer CDC schemes.”

He outlined the challenge with defined contribution was that most people do not know how long they are going to live and so there is a concern they may run out of money before they die. 

However, Fairs said in actual fact, studies in Australia and America showed the opposite, where quite frequently individuals were so worried they will run out of money that they did not spend enough of their retirement pot. 

Fairs said there was a sense that people have turned their backs on annuities over high costs and a feeling of lost control.

“Quite often in surveys you read that what people actually want is predictable income, and I think they probably want predictable income with a degree of flexibility, which is what a CDC scheme is potentially able to offer,” he said.