CDC hailed as ‘injection of innovation’ on launch day

‘CDC day’ today comes after a long effort to introduce an alternative to defined benefit (DB) and defined contribution (DC) models culminating in the DWP’s confirmation last December that it would proceed with regulations and a greenlight from The Pensions Regulator (TPR) in January.

The new alternative schemes allow savers to pool money into a single fund which pays an annual income. Royal Mail, which has been working on the proposals since a decision to close its DB provision in 2018, is the first company expected to open a CDC scheme.

The DWP today reiterated its view that CDC can provide improved retirement returns for savers along with “predictable” costs for employers.

“Both employers and employees contribute to a collective fund from which individual retirement incomes are drawn, with trustees responsible for oversight to ensure schemes are viable and can meet their legal requirements and commitments to members,” it stated.

The passage of the Pension Schemes Act 2021 made CDC a reality in the UK and talks are already well underway for the continued roll out of the scheme type to include multi-employer and master trust models from as early as next year.

Pensions and financial inclusion minister Guy Opperman today said it was clear from successes overseas that CDC could provide a suitable new alternative to DB and DC.

“CDC schemes have the potential to transform the UK pensions landscape,” he added. “It is abundantly clear that, when well designed and well run, they have the potential to provide better retirement market outcomes.”

An additional benefit highlighted by Opperman was the potential for CDC schemes to be “resilient to market shocks”.

“I have no doubt that millions of pension savers will benefit from CDCs in the years to come,” he said.

Aon partner and head of CDC Chintan Gandhi stated today’s launch is a milestone moment for workplace schemes almost ten years in the making.

“It’s the direct result of the incredible thinking and work that has taken place in the industry,” he said. “In my opinion, this is the biggest innovation for UK pensions in a generation.”

Gandhi told PP he believes the length of time in bringing CDC to reality was reflective of the high bar set by the DWP and TPR.

“The bar needs to be high in order to maintain confidence in the system,” he said. “We need to ensure that CDC schemes are governed well from the outset so it can be demonstrated that they really can be valuable.”

Indeed, the government was bullish in an April response to the fourth recommendation of the Work and Pension Committees’ (WPC)  25 design reforms laid down in January when it addressed the question of whether it would publish a framework for assessing the success of the Royal Mail CDC scheme and other early schemes. It was confirmed actuarial testing and modelling will be required from schemes on an ongoing basis, with TPR keeping a close eye on early operations.

Pensions and Lifetime Savings Association (PLSA) director of policy and advocacy Nigel Peaple said the appeal of CDC lay in how it blended the most desirable elements of both DB and DC.

“By pooling longevity risk and the ability to invest money over a longer period, CDC has the potential to provide new and better approaches for benefit provision,” he explained.

Despite this, Peaple said there were challenges afoot, including how to ensure savers fully understand the benefits of the model.

“Nevertheless, [the PLSA] is confident that this ambitious proposal will provide the incentive and momentum to overcome them,” he concluded.

Read more: Guy Opperman – let’s cement confidence around CDC