Under current proposed timelines, multi-employer CDC schemes are expected to secure regulatory approval in 2026, with a view to accepting contributions from 2027.
So we ought to be starting to think about what being in a CDC plan will feel like , if in one. What will it feel like for employer’s using one to meet auto-enrolment requirements? What will it feel like to people running them?
The Government says they will be better but does that mean feel like a better DC plan or like a better DB plan?
In this blog I argue that people need to feel they are in a plan like they had when in a DC plan but have benefits like they hoped for – bigger pensions , better value for money.
This means the same for the employer and better for employees – sounds like most employers will accept a DC scheme moving to CDC. That suggests DC plans that want the least trouble for the employers who use them (including GPPs) , should think about switching to CDC. But can they manage running CDC? This blog asks that question.
Let’s not forget that if commercially, you are running a Group Personal Pension or DC Master Trust , your job is to get the £25bn in 10 years, sell out to another commercial entity or reconstitute yourself as a CDC plan. The third option may be hardest or easiest depending how adaptable you can be.
This is the Government talking – it’s pretty certain about CDC
For employers it is easy – CDC schemes will be treated as DC workplace pensions.
For many, CDC is a variant of DC and it certainly has the same impact on the employer as a workplace pension. For an employer in a multi employer CDC pension there is no difference in terms of payroll operation, no obligation to pay a penny more than the auto-enrolment mandate. There is no liability to the employer if the pension promise is not met and no expertise needed in scheme management.
But where there is a big difference is in the administration of the arrangement once money arrives. CDC will introduce “significant complexity” to the market, and schemes that fail to invest in appropriate technology could struggle to remain compliant or competitive once these new models become available.
What is different?
Members of DC funds expect to see the value of their fund, the member of a CDC fund will see the pension they have bought. The value of their pension could and should be available but the big difference with CDC is that it promises a pension not a pot – like a DB pension does. 42 years in pensions tells me that savers don’t care very much about their funds, they care an awful lot about what they’re getting and people worry about their pension not their pot. This is how the Government expects CDC pensions to turn out much better .
Success in the world of pensions isn’t just about getting people saving, it’s ensuring their savings work as hard as possible for them.
Too often at present we are leaving individuals to face significant risks, about how their individual investments perform and how long their retirements last. Pooling some of those risks will drive higher incomes for pensioners and greater investments in productive assets across the economy. Torsten Bell- Pension Minister
The cost of buying a pound of pension will depend on the duration between paying the contribution and drawing pension; it will also depend on the investment return of the fund while the member is involved (till death or even a second death). But that’s a long time and smoothing of returns over time means that the pension should be consistent. The only thing that will change from “duration” is the long-term prospects people have of living.
The challenge for administrators will not be complexity, the simpler the better. The challenge will be to ensure that the pricing of pension pounds at outset is repriced each year to ensure that the pension promise (what has been quoted at outset ) is met. The pension can be higher (in good times) or lower (in bad terms) but how expectations of the pension coming the member’s way will need skill. Running this sensibly will mean high quality systems that tell the story to the pricing mechanism (and an actuary) all the time.
It’s a mistake to think that CDC administration can be based on reheated DB systems. There are significant differences as CDC pensions demand real-time tracking of collective fund performance and dynamic income adjustments based on actuarial modelling. From Corporate Adviser.
Schemes will also have to build adaptive calculation engines for variable benefit payments and deliver transparent and accurate member communications that explain collective risks and benefits.
The collective risk is that the membership of the scheme live too long . Long life can mean that the amount paid to younger members has to reduce to pay till the day of death. People who die earlier than expected will mean a potential increase in the pensions left in the pool.
This is what is meant by “variable benefit payments“, the “adaptive calculation engine” means a pricing methodology that smooths out changes in the fund value and valuation expectation, it will also have to make sure that amounts taken out of the fund to meet expenses are properly spread so that one group don’t end up paying the expenses for others.
This is all different. But complicated as this may look, complicated it need not look to members. They can simply see the target pension and whether it has improved or fallen since a recent valuation of the scheme.
CDC schemes are sometimes called “target pensions” -this is an old Aon advert for CDCs.
Is a CDC scheme a DB or DC scheme to administer?
Something that DC pensions have on DB plans is the accommodation of all kinds or transfers. These can be transfers in from other DC plans, single payments through payroll or from a bank account. DB plans do not generally take single contributions. Will CDC plans follow DC or DB in this? If the scheme follows the DB route it will look rather like the Royal Mail CDC scheme which works like a DB scheme , targeting an accrual based on salary earned. If the scheme follows the DC route, it will be buying pounds of pension based on the size of the contribution.
I have read recently people talking of one type of CDC or another but seldom of both. I hope that we will have variety of approaches. I don’t mind doing it the DB or DC way – so long as I get a better pension.
Transfer values -DB or DC?
Again there are two types of transfer, a DB transfer is calculated by discounting the pension anticipated to be paid while a DC transfer is calculated based on the pension bought so far.
My sense is that people want to know two things as they go alone, firstly the pension that has been bought and the value of the pension if it was to be taken elsewhere. This is of course bringing together the pot and pension valuation and I can’t see CDC doing anything but both – people will want both online. Both can be done whether going the DB or DC route but let’s not pretend that transfer values will need to be available and can’t be anything less than online. This should be the aim of any CDC system from outset.
A DB or a DC scheme? Does it matter – it’s a pension scheme!
For most people they are in a pension scheme and what they get hacked off is when they find they are getting a pot not a pension. Of course a pot is better than not getting a pension (as happened in the 1990s if you were employed by Robert Maxwell). CDC cannot be Ponzi’s, they must be properly managed and regulated but there will be more uncertainty about the income than DB but more pension than a DC plan.
What do you want – uncertainty about how much more you’re getting or certainty you won’t get an awful lot! CDC isn’t a certain pension but it’s certainly better than what most of us get!
