Collective defined contribution (CDC) schemes “could provide members with greater certainty and potentially higher incomes”, according to the Pensions Policy Institute (PPI).
In its report, What is CDC and how might it work in the UK?, the PPI assessed the potential benefits and issues facing CDC schemes entering the UK pensions landscape.
The report found that it has the potential for higher and more predictable retirement incomes, in comparison to individual DC.
Furthermore, it could give employers greater certainty about costs and liabilities than with DB schemes and provide a more efficient way to offer employees a “generous benefit” than individual DC.
PPI policy researcher, Lauren Wilkinson commented: “While CDC has the potential to provide benefits, there are also hurdles such schemes will need to overcome when being designed and run, in order to achieve these benefits and minimise risks.”
One of the issues facing the implementation of CDC schemes is ensuring that no generation benefits disproportionately at the cost of another.
Additionally, it could be difficult to find coherence with the existing pensions landscape in the UK, especially pensions freedoms, and governance needs to ensure a certain level of continuity and long-term perspective, “with targets being set and revised regularly”.
Finally, CDC schemes would need to be clearly communicated to members the targeted nature of benefits.
Wilkinson continued: “Intergenerational fairness is one that’s often raised, but another significant challenge will be communicating the targeted nature of benefits to members.
“Both of these issues have caused tension among Dutch CDC members, so an important component of establishing CDC schemes in the UK will be in ensuring that scheme design can overcome these challenges.”
Royal Mail was the first large organisation to announce it was considering a CDC scheme for its members and is working and consulting with the government on making it a reality.
Wilkinson concluded: “Any further CDC schemes that are subsequently set up in the UK are likely to use the Royal Mail scheme as a template rather than looking at international scheme design, particularly as legislation will be structured around enabling the Royal Mail scheme in the first instance.
“It will be interesting to see how this evolves as the consultation process gets underway and Royal Mail reveals more details of its proposed scheme.”