The government’s release of its collective defined contribution (CDC) pension scheme consultation has been met with a mixed response from those within the industry.
Aegon pensions director, Steven Cameron stated: “The concept of CDC schemes has proved particularly controversial across the pensions industry, gathering strong support from some, and raising equally strong concerns with others.”
Many believe that, in order for CDC schemes to work, there are challenges to overcome and concerns to alleviate. River & Mercantile Solutions head of DC solutions, Niall Alexander thinks that CDC schemes “have potential” to improve member outcomes “as long as the investment strategy is appropriate”.
“Getting the investment strategy right will be key to making CDC work. CDC can’t afford to let investment fall below other items on the agenda – it needs prominence to ensure the overall aim of improving member outcomes is achieved,” he added.
Some have argued that there needs to be effective communication to ensure that potential CDC scheme members are clear about what they need to do and how it can benefit them.
AJ Bell senior analyst, Tom Selby commented: “Simply referring disgruntled members to a complex set of scheme rules they signed up to blindly years ago won’t be good enough. Getting these communications right will arguably be the biggest challenger for employers who choose to go down the CDC route.”
Royal London director of policy, Steve Webb believed that it will be “many years” before “a single CDC scheme” will be adopted in the UK due to the “timetable for consultation and potential legislation”.
He also has concerns that the legislation will be too tailored towards Royal Mail: "Designing the legislation specifically around the needs of the Royal Mail is understandable, but probably also limits the potential for other employers to implement variations on the Royal Mail model.
“One of the attractions of CDC for members is the smoothing out of the ups and downs of the stock market, but in the Royal Mail’s model there is no ‘buffer’ to cushion the impact of such changes on member benefits. This could mean pensioners seeing their pensions in payment cut from one year to the next which will present a massive communications challenge”.
However, some people in the industry are more positive about the impact that CDC schemes could have, including Hymans Robertson partner at pensions and risk consultancy, Rob Harper:
“There is a clear benefit from some form of pooling of risk for individuals in retirement and this consultation is a step in the right direction to provide a more reliable income for millions in employer pension schemes where the future looks uncertain.
“Compared to annuitisation and drawdown, CDC could potentially deliver this security in an alternative and pragmatic way by pooling risk for members, particularly in the later stages of their retirement.”