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?