Cross-over between CDC, DB and DC
There have been two responses to Is demand for “Royal Mail” style pension deals increasing? One is mine and a reply, the other by another enthusiast.
As someone who is actively promoting DB, particularly to employers, there are one or two points I would like to come back on:
An individual with multiple DB pensions from different periods of employment is not necessarily disadvantaged against someone who worked for the same employer for much of their working life. When you come to retirement the guaranteed pensions are cumulative, have been revalued in deferment, and the employers are taking the investment risks and picking up the administration costs . PPF benefit risks (if indeed there are any) are also minimised.
I understood the concept of multi-employer CDC was to mimic this as far as possible by providing a common benefit structure that allowed the member to continue target benefit accrual uninterrupted on change of employment, hence the early interest in multi-employer CDC by particular industry groupings often with proximity to the public sector, such as private education, housing associations, clergy etc. I was surprised Unions were not more active in promoting multi-employer CDC for their Members, but then they probably don’t wish to discourage employers from providing DB pensions.
Unfortunately TPR’s Guidance on multi-employer CDC with its roots in DC rather than in DB rather undermines this with its emphasis on sectionalisation of the fund, implicitly suggesting individual sections for each employer. While an employee in a CDC scheme leaving the scheme or section on change of employment still benefits from revaluation of target benefits if he leaves his funds in the scheme, the very fact that he is forced into a new scheme or section is likely to raise questions as to whether he should move his accumulated fund, exposing him to the risks of DC transfer decisions.
I personally believe that CDC should address the age related accrual issue by having a common target benefit accrual for all ages but that employee contributions could be age related. This would be funded by non age related employer contributions. However again this would depend on continuity of membership and would need protections against age related scheme or section selection by the member or the employer.
Still I do believe that multi-employer CDC, particularly through longevity risk pooling, whole life investment and cash flow management, and scale does provide a significantly enhanced employment benefit over DC for employers unwilling to offer DB pensions.
As suggested elsewhere should NEST provide CDC benefits?
PensionsOldie,
I think we may see sectionalism in some multi-employer DB schemes for the reasons outlined below.
Some employers are happy with DC as a means of accumulating and can’t be doing with a DB scheme to replace or avoid a DC scheme, they may just want to offer a DB benefit (or CDC benefit) following a transfer at retirement.
This is known in CDC circles as “at retirement” CDC. DB doesn’t do it though it is what Pension SuperHaven is set up to do.
The problem with running a multi-employer scheme with a section for those “at retirement” is that the investment strategy for a whole of life group is that they may be prescribed an investment strategy different from those over 55.
Like you, we don’t see why employers who want to offer a DB benefit with DC contributions shouldn’t operate a single non-sectioned scheme. After all they are probably hoping that as people move from like-minded to like-minded employers , they will suffer no loss. This is already in place in some schemes where the benefits are the same whatever the employer. LGPS is one where there is the same approach based on a salary based benefit system.
I’d like to see that approach extended to a DB scheme offering contribution based promises that take into account age and perhaps some underwritten factors.
I agree with you that having DB coming at you in a series of cheques or TTs is not a problem – I hope I will have this when I get the state pension and my DB pension.