Fundamentally the issue is that legislation is designed to provide an occupational pension system that nobody, except those that have a vested interested in complexity and administration, wants, Employees wish the reassurance of a known income in later life, while employers wish to reduce both the current and future costs of meeting their employees’ aspirations.

Although infinitively more efficient than DC (especially accumulation and decumulation DC), CDC is a poor substitute for DB and it is vital that it does not fall into the same traps, particularly that of only considering failure. The key cornerstone will be the valuation measures adopted to assess the pooled fund against the future cash flow commitment represented in the target benefits.

In the early days of a pooled CDC fund it is likely to appear to outperform an established pension fund because it will be cash flow positive. In probably 20 plus years time the CDC fund will have matured, where its key financial objective will be to ensure that the cash inflow from new contributions and dividends and interest received exceeds the benefits paid out and the administration costs met.

In both phases the market or realisable value of the assets and especially the discount rate applied to the targeted future benefit payments are entirely irrelevant to the key success factors, these being the attractiveness of the Scheme for new contributions and the actual cash inflow generated by the existing investments.

It is only in the terminal phase of a CDC scheme when the cash inflow from new contributions has dried up that the realisable value of the assets becomes an issue. By then the current pensions in payment, probably of fairly mature pensioners, will be the key cash flow determinant.

To deal with a deficit then being projected, the obvious solution would be to merge the CDC scheme into an another cash flow positive CDC or DB pension scheme that can generate increased future returns from the combined asset pool than could be achieved by the failing CDC fund repeatedly disinvesting.

With surplus assets, the remaining mature pensioners are in for substantial unexpected windfall gains which probably could be used more efficiently for society across a wider pool. Even in the terminal phase, the discount rate applied to the liabilities is irrelevant.

Why O Why – do we not just come clean and accept that a fully open DB pension scheme is the most efficient way of meeting employees’ retirement income aspirations at lowest cost to the sponsoring employer!

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Pension Oldie;  you know the diagram I publish for both DB and CDC pension plans (I  publish this diagram here to counter your important contribution which I quite disagree with).

In my view you are wrong in assuming that either a CDC or DB plan needs to close. This diagram was created by Derek Benstead – you may know him.

Your assumption is that the covenant closes – the employer says “no more” and pays no more. This is less likely for both DB and CDC if there are many employers. It is  less likely in CDC when the defined contribution is flexible.

I don’t think it is easy for an employer to negotiate its contribution down but I think it can be done, especially if schemes work on a money purchase basis (non guaranteed pension purchased for every contribution rather than a DB accrual replica (as with Royal Mail).

I would hate to be in a CDC scheme when the employer contribution went down but I’d rather that than being in a DB scheme closed for future accrual and then failed to meet its obligations. If an employer goes out of business, there is no contribution (not even an AE mandated amount) but that does not put at peril what has been paid into a CDC scheme, since there is no guarantee and future contributions need not be required to keep the scheme alive (hence no need for the PPF). DB schemes are vulnerable to a greater degree.

But let’s not get hung up about pension schemes closing when participating in a CDC scheme.  It certainly will get less easy when a scheme is paying out as much as it is taking on but keeping a balance from income and pension payments will be part of the management of CDC schemes. A new employer will be found and if one isn’t then other options will include merger with a stronger scheme. There is always a way to maintain the promise , because the promise is not a guarantee other than best endeavours.

I know the DWP are desperately bothered about this question but if we took the assumption of failure, we would never set anything up but things we could take down; a bad state of building that would be!