Sounds stupid, but it is what CDC is promising. From 2027, employers can ditch their DC workplace pensions for CDC workplace pensions with the promise of 60% pensions at retirement for the same “pain” while an employee’s at work.
Employers can of course pay more than 8% of a band of earnings and many choose to do. Why? Because many employers see pensions as more than a requirement , they see it as an employment benefit and the benefit of a pension as deferred pay.
The general feeling around pension circles (focussing on the Pension UK proposal) is that employers should pay 12% not 8% and that this should be mandared. The Government have rejected this and instead proposed that the pension arsing from the defined contributions increase by what and actuarial firms agree on average will be 60%.
In short the Government says that pensions should increase their efficiency by becoming collective in their ways of distributing pensions or stay as individual pensions with a good excuse for staying less. For many companies, the flexibility of drawdown will continue to be a preferable freedom for staff but in future, the pot individuals get at retirement must be turned to a pension or an annuity so that income does not run out in later years. Nest has set a drawdown system in place that will pay annuities from the 85th birthday of the person drawing down the income.
I suspect that the employers who are looking at their choices ahead of them will prefer the prospect that the Government lays before them of increasing pensions rather than pension freedoms (till 85 or some such birthday) and will prefer both options to having to pay 50% more in pensions (12% rather than 8%).
Which begs the question, “when can employers switch from DC to CDC? “. Theoretically any time after July 31st 2026 , though the authorisation of schemes can only begin from the day after. In practice the Pensions Regulator is estimating up to 6 months from the date it opens for application which means the first CDC schemes will be fro January 2027. We know of a commercial provider keen to bet at the gate – TPT (once known as the Pensions Trust). We know that the Church of England would like to run a scheme for the 700 employers who they have responsibility for and I am keen to progress a scheme for employers who have asked.
It seems to me that CDC will be a mutual business with those who enter into an agreement with a CDC provider (known as a Proprietor) wanting to have some skin in the game. Should not an employer, look to take some interest in the collaborative and collective pension that they enter into? I would be surprised if a commercial agreement between the Proprietor and the customers isn’t entered in where revenues though an equity sharing agreement isn’t commonplace. Shouldn’t profits from such a venture be able to subsidise of contributions, shouldn’t they be an incentive for employers to pay more into the CDC plan?
I would like to see employers delight in improving the payments their schemes make in retirement and for pensions to become an employee benefit as it was in the past. The system of taxation, provided it remain in place after the Budget, is generous to employers who have to pay not national insurance on contributions for the employee’s benefit, and they can write off contributions against profitability giving them relief from corporate taxes.
Surely the chance of improving a pension by 60% at no cost and the prospect of some happy staff , is a chance worth looking at?
I am a bit puzzled by your percentages, Henry.
Under auto-enrolment the minimum employer contribution is 3% band earnings, They can of course pay more – and even I believe themselves pay the 5% employee contributions if they so wished (with Corporation Tax and NI relief of their actual payment).
I understand the original proposal to increase the minimum auto-enrolment contributions into a DC (? and a CDC pension) to 12% was with employers paying 6%. So the employer’s contribution would double from 3% to 6%. the question would therefore be what annual pension would that provide in a CDC scheme.
Using 2024 valuation assumptions from a DB scheme it appears that 12% would roughly fund a targeted accrual rate of 1/80th of pensionable pay (with cpi up to 2.5% increases) in a CDC scheme (with a very small allowance for administration costs), compared with less than a 1/128th in a traditional DC arrangement (based on the Government’s 60% improvement assumption). However as the administration costs are unlikely to flex with contributions paid in, an 8% total contribution would provide less than than 1/120th in CDC and 1/180th in DC.
It is perhaps no coincidence that the 8% minimum contributions for auto-enrolment is replaced by a 1/120th of relevant earning minimum benefit accrual rate in an auto-enrolled average salary DB scheme (with cpi up to 2.5% pension increases). However the administration costs would then have to be borne separately, ? by the employer.
With DB the employee’s pension is defined, guaranteed and protected by the PPF. In CDC the pension is targeted not guaranteed. Above target investment performance in CDC improves the employee’s benefit while in DB it reduces the employers’ funding cost. Below target investment performance results in loss of pension in CDC but increases employer’s funding costs in DB.
As both sectionalised and non sectionalised multi-employer DB schemes have been around for a considerable time and where the employer benefits from the investment performance and the sharing of administration costs, but have not attracted a significant proportion of employers, I cannot see equivalent arrangements where the benefits and efficiencies accrue to employees becoming attractive to employers selecting CDC benefits,
Surely the industry needs a new vocabulary describing the outcome for members and dependents linked to reality such as an index linked living wage. Success should be recognised based on outcomes not inputs.
Investment performance needs to be greater perhaps taking over trades such as credit cards (20%pa) the lottery, other gambling, toll roads, annuities etc. is it time to stop buying quoted shares at 30 x earnings values and where senior management are paid obscene compensation funded by buybacks robbing the companies of investable capital in the host company.
The AE contributions are of course split between member and employer (though due to salary sacrifice now look like non-contributory. But for the employer, the amount going to a workplace pension starts at 8% (band earnings) and Pensions UK is demanding that it goes up to 12%. My point is that the impact of increasing the efficiency of the 8% gets to where you’d be at 12% if you stayed in DC as it is today.
There are many hostile to this view and you can find them on linked in saying so- others say so on podcasts – and one or two write to me disputing a 60% uplift in efficiency from moving to CDC. It is not my number, it is Hymans, Aon and Watson’s and the Government use it.
We need people to be told they are saving for a pension not a pot, a pension will be shown them even for their DC pots – when they go on the Pension Dashboard. I think that income linking for pensions will eventually become the default (most annuities pay a level income right now).
I love your vision on the use of pension money. We need to have a different vision than that is currently dominating DB (gilts and bonds in readiness for buy-out) and DC (diversification through global passive equities increasingly investing in US technology).
“… We need people to be told they are saving for a pension not a pot, a pension will be shown them even for their DC pots – when they go on the Pension Dashboard.”
Back in the States, the folks in the retirement and insurance industries also assert that this is all about retirement, that “income is the outcome” when it comes to tax-qualified plans (in America, like the 401k).
However, when we look at how assets are used, when we look at Congressional direction, when we consider that most Americans live a lifestyle at or beyond their means (paycheck to paycheck), the fact is most Americans are told their 401k is a retirement plan … and, as a result, there is a natural resistance to savings, to limit deferrals to what the individual believes they can afford to forego or earmark today for a distant, uncertain, perhaps unlikely or impossible “retirement”. We end up deploying tools like behavioral economics because folks won’t save, or aren’t likely saving enough. Simply, saving for retirement isn’t less important, only less urgent.
The most successful strategies in the states are those which don’t focus 20 year olds, or 30 year olds, or 40 year olds or even many 50 year olds on saving for retirement – but on accumulating wealth.
The most successful strategies are focused on demonstrating Americans of all income levels can become a “middle class millionaire … someday” – that the 401k should be positioned as a “Lifetime financial instrument”, and that instead of “saving for retirement”, the better focus is to “drive to your dreams”, or “saving along the way to retirement.”
Yes, you must focus on income in your 50’s – and adjust your plans to stop employment, and your lifestyle in retirement. Until then, save all you can, and leverage the plan’s tax free liquidity provisions, as necessary, along the way to and throughout retirement …
See:
https://401kspecialistmag.com/maximize-outcomes-not-incomes-die-with-zero/
https://401kspecialistmag.com/most-young-people-should-not-save-for-retirement-in-their-401k/
Else, how should American’s think about Congressional decisions to liberalize taxable leakage opportunities …
https://401kspecialistmag.com/congress-did-you-ever-have-to-make-up-your-mind/
https://401kspecialistmag.com/is-congress-mad-are-you/
So am I missing something, but why hasn’t Nest announced it’s moving to CDC as soon as permitted? The current 14m members have been told they have a workplace pension, and they have nothing of the sort. I was with my dentist at dinner last night (obviously a member of the NHS scheme herself as a practitioner member) but her staff are in Nest. She didn’t believe me when I said ‘but your staff haven’t got a pension like you, they have tax incentivised savings’, no she said ‘it’s a workplace pension’. Now, clearly she is a very bright dental surgeon and she’s confused by how this has been marketed to her, so what do her nurses think? Their only other connection to pensions is their NI, and that is buying them a pension (actually eligibility for a final salary pension not just getting ‘my own money back’ as so many think, but that’s another mis-communication issue). As employers really can’t afford to get to the contribution figures that are needed, we have to convert to CDC, and we have to start being honest about what these pots are. The WASPI protest will be nothing compared to the outcry we’ll get when the AE cohort find there is no pension at the end of the rainbow
Kate , we are linked by many things – payroll, pensions, methodism and we do a lot of shopping at M&S! Your post is very accurate, CDC say that they will have aspects of CDC in their solution but they did not think they could offer their members the lack of flexibility of drawdown.
I have spoken with Nest’s Paul Todd about this and he confirms that while members will have their own pots in decumulation, they will have to swap it for an annuity in 85. The argument is that pots are too small and the needs of average employees with little savings is best solved by “flex and fix” – the CDC will come into the payment of increases on payments made to members drawing their income – this will come mysteriously from what Nest “can afford to pay”.
I hope that Marks and Spencer will speak with your master trust provider and ask them what their plans are, if they have no plans, perhaps you should look around because there are clearly going to be better options, immediately in UMES and later in Retirement CDC.