The 1st August is the day applications open for a new type of UK pension – what pension people know as CDC (though in regulation it is collective money purchase).
It’s been a long time in the making, but today marks the start of the new CDC pensions in UK. I believe a great future awaits them. pic.twitter.com/t1jBhCRq4K
— Adrian Boulding (@AdrianBoulding) August 1, 2022
The party line from the DWP is about innovation and can be read here. The DWO – and especially the Pensions Minister , have been supporting innovation through CDC since March 2018 (read this blog for Guy Opperman’s early comments). But by setting the regulatory bar as high as TPR’s CDC code does, the DWP has so far only offered a niche service for Royal Mail , its actuaries and lawyers. The DWP acknowledges that it needs to widen the user-base, but it’s light on a marketing plan. For consumer driven innovation, the DWP should be looking more broadly, in particular it should be making CDC part of its “decumulation review”, due to launch a consultation soon.
I am more interested in the views of those who have a consumer focus, and look at CDC as potentially a “pensions boost for millions”.
Adrian Boulding is one such enthusiast, I am another. It’s not just Adrian and I , who are excited. The FT has firmly pinned its colours to the mast in supporting a collective way of spending on. as well as saving for, retirement.
Collective Defined Contribution plans (CDC), are an alterrnative to the UK’s two main pension models, Defined Contribution (DC) & Defined Benefit (DB).
CDCs could potentially provide improved retirement income for DC savers, wtith more predictable costs for employers than DB.
— Josephine Cumbo (@JosephineCumbo) August 1, 2022
Research conducted by the RSA from customers saving for retirement (July 2021)
CDC savers are not promised a set secure retirement like DB. CDC savers are offered a ‘target’ income which is dependent on scheme returns.
CDC is said to be a better option for most DC savers who struggle to make investment decisions. CDC manages investment and longevity risk.
— Josephine Cumbo (@JosephineCumbo) August 1, 2022
The framework is not yet in place for CDC schemes to be offered more widely to UK workers.
Regulations in the UK only allow single or connected employer CDC schemes.
The Govt says says there’s interest in expanding CDC models, including multi-employer CDC schemes.
— Josephine Cumbo (@JosephineCumbo) August 1, 2022
Employers are not very enthusiastic
How will CDC change the landscape for UK savers beyond Royal Mail?
It is fair to say that there isn’t a vast amount of interest from employers currently offering DC plans to upgrade to a collective plan for their workers.
— Josephine Cumbo (@JosephineCumbo) August 1, 2022
CDC currently looks like a work in progress
On the other hand, employers who are running open DB schemes may show more interest in CDC.
It is possible that CDC could prompt more DB closures, because this is cheaper for employers to run, and more palatable an option than shifting workers straight to DC plans.
— Josephine Cumbo (@JosephineCumbo) August 1, 2022
Retail or “contract based” CDC
So far, there has only been interest in running CDC as an employer sponsored scheme. But I see demand from consumers for a default investment pathway that is neither an annuity or a drawdown policy but something in-between.
“Annuities without the guarantees” or “Drawdown which never runs out” (bottomless drawdown) are concepts yet to be properly explored by insurers or regulators.
It’s likely that retail – or contract based CDC will be delivered through a fund not a scheme.
Let’s hope that now CDC is “open”, we can get on with “opening” the concept to those not the Royal Mail delivers to!
