As easy as CDC: why we must move quickly to allow new collective pensions

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Published date
24 Jul 2018
Allowing a new breed of pension schemes could help to end the UK’s pensions lottery
Money

A cross-party committee of MPs has become the latest group to urge the government to move quickly to allow a new breed of collective pension schemes to be set up in the UK.

In characteristically vivid terms, Work and Pensions Committee chairman Frank Field invoked the memory of social reformer William Beveridge in his advocacy of “Collective Defined Contribution (CDC)” pensions.

By allowing savers to pool their money, these pensions could help many to a more predictable, and possibly wealthier, retirement.

The TUC’s view is rather more understated than Field’s, though we share the committee’s desire for swift action.

Introducing CDC pensions is probably not akin to founding the welfare state.

But, as we have long argued, they could provide a really useful “middle ground” option between the types of workplace pension currently available.

Pensions Lottery

If you are in a well-funded and well-run defined benefit scheme, which pays out a pension in retirement based on your wage or length of service, you get the protection of the employer standing behind the scheme. These valuable benefits should be defended.

But for various reasons – take your pick of labour market change, political incompetence or regulatory overreach – few such schemes are still open in the private sector.

In their place have come defined contribution schemes, which typically attract lower employer contributions than DB schemes.

What they pay out at the end depends on the performance of financial markets – a Pensions Lottery that makes it impossible for workers to know what they will have to live off in their old age. And it’s not straightforward for savers to turn their money into a secure income.

So what are CDC pensions?

The committee dealt effectively with the frequent complaint that CDC schemes, widespread in countries like the Netherlands and Canada, are alien to UK pensions culture.

“While the UK does not have a history of CDC, it does have a tradition of collective pensions in the form of DB,” it said.

It also swatted away claims that CDC is at odds with recent changes to retirement income.

“Rather than being incompatible with pension freedoms, CDC is arguably completely consistent with it—it is an attractive choice for people seeking a regular pension in a low interest era in which DB pensions are in decline.”

The committee encouraged the government to allow various forms of CDC schemes, including single and multi-employer formats. This would give a range of employers the chance to enrol their staff in such a scheme.

CDC schemes give members a share in a pool of assets rather than their own pot of money. Pensions can be paid out of money flowing into the scheme, allowing long-term investment and insulating members against sudden dips in investment markets just ahead of retirement that could have a substantial impact on their old age income.

Time is of the essence

As discussed previously, there has been a growing consensus that reform is needed.

At Royal Mail, employers and the CWU trade union agreed to establish a CDC scheme – if the government put the rules in place.

And CDC schemes have the support of Labour’s shadow pension schemes as well as the government.

The issue now is one of speed. There are also some significant creases that still need to be ironed out, such as methods for calculating and distributing benefits, the role of trustees and the shape of regulations.

But the MPs urged the government to amend legislation passed in 2011 as the quickest means to allowing CDC schemes to be established. The biggest barrier that remains is one of political will.