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Under CDC schemes, employers and employees pay a fixed rate of contributions, collected in a manner similar to defined contribution schemes. Benefits are paid with a target in mind, similar to defined benefit schemes, but with the prospect of variable increases — and the possibility of decreases.
The aim is to provide a pension with a cost certainty, with no likelihood of deficits emerging as they can in DB arrangements, while providing for a higher average pension in retirement than is typically available from DC.
CDC schemes operate as a collective investment fund, thus mitigating volatility and stabilising member pension levels, while freeing members of the need to make complex individual investment decisions and removing the risk that they might run out of money in retirement.
The Pensions Regulator launched a consultation into the code governing single-employer CDC arrangements in January, and the existing regime is limited to that type of arrangement.
The Department for Work and Pensions has, however, confirmed that work has begun on expanding CDC to cover multi-employer arrangements, with TPR’s single-employer code potentially serving as the basis for future regulations expanding the scope of CDC.
The DWP plans to consult later in the year on prospective design principles to accommodate new types of CDC schemes.
Trustees of CDC schemes will be responsible for oversight, ensuring that schemes are viable and able to meet legal requirements and their duties to members.
“We have seen the positive effect of these schemes in other countries and it is abundantly clear that, when well designed and well run, they have the potential to provide a better retirement outcome for members and can be resilient to market shocks,” Opperman said.
“I have no doubt that millions of pension savers will benefit from CDCs in the years to come.”
Nigel Peaple, director of policy and advocacy at the Pensions and Lifetime Savings Association, added: “The PLSA supports innovation within the pensions sector where it improves people’s retirements. CDC blends some of the desirable elements of DB, such as clearer target outcomes for the saver, and of DC, such as predictable contributions for the employer and member.
“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.”
Peaple acknowledged that there would be “challenges”, such as “how to ensure savers understand the variability of benefits, and ensuring new models can deliver in practice once reserving and regulation is in place”.
However, he said he was “confident that this ambitious proposal will provide the incentive and momentum to overcome them”.
CDC authorisation and supervision will be administered by TPR. Pensions Expert understands that CDC will be made available in Northern Ireland once parallel regulations are in place.
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