On Wednesday (October 8th), CDC will be debated in the house of commons and with a fair wind, legislation enabling employers and multi-employer master trusts to provide DB like benefits for defined contributions will be enacted by the end of the year.
To mark this special week for CDC, the consultancy-Willis Towers Watson has published a guide to CDC together with supporting analysis of how CDC competes with other types of pension schemes.
The aim of the Guide is to increase the public’s understanding of CDC pensions, and increase levels of interest in CDC in the pensions industry.
The new analysis compares the likely outcomes of CDC pensions to those of insured annuities, and typical DB pensions (for given levels of contributions. The “spectrum of choice” , as the Pensions Minister calls it , has become clearer for this guide.
It is good to see that the new type of pension has, in Royal Mail, an early adopter. It is good to see how Royal Mail’s CDC plan has brought together the company’s management with its major union (the CWU) to avert what could have been damaging industrial action and replace it with a constructive “wage in retirement” solution. A solution that has been embraced by over 100,000 mail-workers.
It is good too that it has brought three pension consultancies, WTW, Aon and First Actuarial together. They have worked to test and promote a new way. It is of course a “new way” that refers back to an “old way”, when DB pensions provided members with an income using the best endeavors of all parties , rather than an income guarantee whatever the market conditions.
Demand for CDC emerged out of negotiations for a new DB scheme for Royal Mail staff
But we should not forget early pioneering work that goes back to Derek Benstead’s stakeholder pension submission last century. Nor should we forget the work of David Pitt-Watson and Hari Mann with the RSA in their research “Towards Tomorrow’s Pension” which goes back to 2011.
CDC’s definition of a benefit is , after more than two decades of debate, finally gaining currency at a time when certainties of employment are most challenged.
One certainty has been the challenge of “pension freedoms” to the concept of collective pensions. It is particularly good to see this collective enterprise providing an alternative to the challenges creating retirement income from individual pots identified only a week back by the FCA .
It is good to see that CDC is enjoying cross party support in both the Commons and the Lords.
But of course CDC has critics who have made their opposition to this form of provision well known on social and conventional media. Their objections have helped make the CDC framework more robust and we should be grateful for constructive critical interventions.
It is in part , to counter valid concerns and in part to demonstrate balance against less rational prejudice that WTW has published this analysis.
You can access the WTW reports from this link.
I can think of no better recommendation to read them than words taken from the email sent me by WTW’s Simon Eagle, who helped broke the Royal Mail deal with my former colleague Hilary Salt.
We have written the guide to be balanced, and the analysis to be transparent – with the aim of helping the truth about CDC’s advantages become more widely known and accepted, which will hopefully shine through.
Appendix; CDC – a little more detail
To help those coming to CDC afresh or after a decent interval, here is a little detail of what a CDC scheme is and some detail on how it fits into that “Spectrum of choice”.
Collective Defined Contribution (CDC) is a new type of employee retirement provision under which employers pay a fixed rate of contributions into the scheme and members are paid pensions with variable increases. This will be a third option for employers, the two existing options being defined benefit (DB) pensions or individual defined contribution (IDC) pensions.
CDC is likely to be most compelling for those employers where the following key advantages of CDC pensions are important:
- Pension costs are fixed, so employers’ pension budgets will not need to vary year-on-year.
- Expected pension levels are higher – for a given contribution rate, the expected CDC pension is on average 70% higher than from buying an insured annuity with an IDC pot, and 40% higher than provided under a typical DB scheme.
And a CDC scheme provides benefits in the form of a pension, so:
- Market volatility is smoothed out so that member pension levels (both pre and post retirement) are relatively stable.
- Members don’t run the risk of running out of money (from a drawdown pot).
- CDC is simpler for members than IDC, as they don’t need to make investment or retirement provision decisions.
Initially, employers wanting to provide CDC will need to do so through their own trust arrangement – employers with large workforces of over 5,000 employees would be best placed to open a cost-effective CDC scheme.
In time, further law changes could enable CDC multi-employer schemes or master trusts, making CDC more accessible for employers with less large workforces.
Henry, the WTW links didn’t work for me. Have they been removed?
There was a glitch in my normal reliable cut and paste technique – which has now been rectified
Henry, I’m generally a supporter of CDC and of Simon Eagle as an ex colleague and collaborator at my former employer WTW.
There are many advantages of CDC but I have to say I am concerned about the assertion that it will deliver 70% more than a comparable DC scheme.
I do not doubt the modelling capabilities of the teams involved. I do doubt the assumption set that leads to this apples vs pears comparison. Of course if you assume equities will always outperform other asset classes and the pooling of risk means that you can invest more in equities for more of the member retirement journey then you’ve made more money for them. These are bold assumptions to make.
There are plenty of potential advantages from the pooling of risk and assets without the need for this more debateable claim to dominate.
@David, you are correct.
My other problem is that seeing so many transfers out of DB schemes, I think that CDC schemes would not fare more better. I expect transfer out around retirement would be as high as 70%, defeating the whole scope this scheme was designed in the first place!
It is interesting to see how Aon have approached the same subject. They aren’t going the excess outcomes route but the dampening down volatility path. Personally I think WTW’s approach is more likely to capture the popular imagination – we need something better than the 4% rule!