CDC schemes not a panacea for stressed DB schemes – PMI

Written by Talya Misiri
08/01/18

Over half of pension professionals think that collective defined contribution schemes are not a solution for stressed defined benefit schemes, the Pensions Management Institute has found.

According to the PMI’s research, 57 per cent of professionals have said that if underfunded DB schemes were to be converted to CDC arrangements, it would potentially be detrimental for members of those schemes, with regulation and maintaining funding being key issues.

Almost two thirds, 65 per cent of respondents saw a lack understanding as the greatest concern over the introduction of CDCs and 53 per cent noted that CDC schemes could be vulnerable to funding problems like that of DB schemes. The fact that benefits are not guaranteed is also a concern for 49 per cent of respondents.

The PMI found that 47 per cent of pension professionals also saw intergenerational cross-subsidies as a disadvantage. It could lead to members being concerned that the contributions of younger members could be used to provide benefits for retirees rather than secure deferred benefits for younger generations.

Nonetheless, over half, 53 per cent, of respondents think that the introduction of CDC would lead to some improvements to UK workplace pension standards. Looking at the key advantages of this type of scheme, 43 per cent of professionals said that CDC schemes would free members from making investment decisions, 36 per cent said that it would lead to higher pensioner incomes and 31 per cent said that CDC would mean members would be largely unaffected by costs and charges.

Looking at how CDC’s could be established in the UK, 59 per cent thought that creating industry-wide or regionally-based schemes, would be the most viable option. Others, 50 per cent, supported the idea of converting NEST to a CDC arrangement as master trusts seem to have a more natural fit.

The survey, which obtained the views of 99 UK pension consultants, trustees, administrators, actuarial, legal and investment professionals, was launched in response to the Work and Pensions Select Committee’s publication of its CDC pension schemes inquiry.

PMI president Robert Branagh said: “Our results show that while there is an appetite for CDC in the UK, it is not seen as a panacea for stressed DB schemes. Ultimately, whether CDC-style arrangements could work would be a question of political will. Supporters focus on the success of the model in other countries and argue that the system combines the more desirable characteristics of traditional DB and DC arrangements. Opponents are concerned about aspects of inter-generational risk sharing in particular.

“The government must take care in assessing the evidence and distinguish properly between genuinely informed comment and simple vested commercial interest. In the context of the wider pension scheme sustainability and development debate, it is certainly one that has provoked a certain amount of animated discussion and will no doubt continue to do so this year.”

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