Kerstin Parker; head of private pensions at the DWP
The DWP will change the way they describe what till now has been called CDC
Whether the DWP can change the way we describe the new way of turning contributions to pensions is a question only time will answer. I am with those (including Black Rock ) who have called on a better name than CDC which is confused abroad with a means to reduce the destructive force of epidemics of disease.
It has not been a happy relationship between civil servants required to introduce “collective pensions”. When it was known by them as CDC , we were told that it would deliver 60% more pension. You can get away with this if you are WTW, LCP, Hymans Robertson and PPI but not if you are DWP it seems.
I have been reproved for repeating what is blatantly the case, that in a straight comparison between CDC and money purchase DC (where an annuity is bought at retirement) CD C is typically offering a 60% pay rise. But when the DWP press room used this number back in last October, there was internal horror.
I will not repeat the sin of reproducing what the DWP press release published but I think that Kerstin Parker is introducing a better term.
Why is Collective Pensions better than CDC?
Apart from the confusion abroad, there is confusion at home. CDC suggests a pot while collective pension suggests a pension. There is no need to call this pension “DC”. Nobody in private pensions considers they’re building up a pension guaranteed by employers any more. If you move from the public to the private sector accept that you lose the guarantee on your pension but you don’t expect to lose the pension too!
As Kerstin says, what’s being promised is an “income in retirement” just like a defined benefit as it’s defined to be paid with CPI increases with a starting pension that will grow over time at a targeted rate, that rate is defined if not guaranteed.
Arguably the phrase “collective pension” could have been introduced earlier, but I support it being introduced now. It is in time for schemes being authorised as I hope Pensions Mutual will be, to adopt the term. If TPR adopt it , in place of CDC, then well and good.
Most importantly, the sooner we get back to defining a pension as an income not a pot, the better. Collectively, it is possible to build a fund that is managed as DB pensions used to be , with an eye for growth and with the bargaining power of a single fund rather than hundreds of thousands of pots. Over time, a CDC fund will become more efficient though in the early years it needs to adopt practices that have to be revived and in some cases – created.
To ensure people get fairness without reversion to the employer making up deficits or manage the luxury of surplus, there need to be collective processes. While there will not be buffers there will be lines of credit available to trustees to ensure that when times for the scheme, the members do not suffer with a reduction in service or potentially of closure of the scheme. These collective schemes will be expensive to establish but in the long term efficient to run , delivering value for money that DC schemes will not match. CollectiveK pension schemes will in time become a popular alternative to DC plans, because they are not about pots but pensions.
