‘Real potential’ for multi-employer CDC schemes in UK

There is “real potential” for collective defined contribution (CDC) schemes to take off in the UK through master trusts, according to Willis Towers Watson (WTW) director and senior consulting actuary, Shriti Jadav.

Speaking at the Trades Union Conference (TUC) Pensions Conference, Jadav commented that while CDC schemes were likely to be made available for single employers towards the end of 2021, this “wouldn’t work for everyone”.

She explained that this was because it would require employers to use an existing trust or set up a new trust, meet setup costs, make sure there was enough money for running costs and gain authorisation from The Pensions Regulator.

Jadav continued: “We think that this would probably be most useful for employers with workforces of 5,000 employees or more for it to be cost effective.”

However, she noted that existing defined contribution master trusts could add CDC sections, adding that this would make CDC “much more accessible and also more feasible for smaller employers” as they would not have to meet governance requirements and running expenses could be spread across more parties.

Jadav commented: “At WTW we have seen interest from a number of organisations in the UK looking to consider the feasibility of CDC for their employees. Some of them have commissioned work with us on potential CDC designs but it does remain early days and they are not yet engaging with their employees or making public announcements.

“For some of these employers CDC may only be possible further down the line in the event that multi-employer CDC schemes or master trusts are introduced. At the moment, conversations have largely been with those in the utilities or industrial sector.”

In the same session, Communications Workers Union (CWU) deputy general secretary (postal), Terry Pullinger, discussed why Royal Mail had been so keen to adopt the CDC model for its pension scheme, stating that he hoped it was “a solution that would unify and equalise pension provision for all our members”.

He explained that, while working with First Actuarial and WTW, CWU and the Post Office had “stumbled across” the CDC model while searching for a way to design a new defined benefit scheme, before conducting research to see how a CDC scheme might have performed in the past.

He said: “We went right back to 1925 to test what our scheme would have produced over the years, had it been in existence as a CDC scheme. With CDC you can increase it, decrease it, keep it as it is, depending on how things have gone in that year, and people have got to understand that.

“We went back to test from 1925 and there was only twice in that period that we would have had to make cuts and that was during the Great Depression. There have been world wars in there and massive financial crashes but the flexibility to manage the scheme, importantly, people would still have their pension and still have their wage in retirement and it wouldn’t have had to close.”