Collective individual defined contribution (CIDC) schemes have the advantage over collective defined contribution (CDC) schemes, a study by the University of Utrecht has found.
The study, which was undertaken for the Pensions Institute at the Cass Business School, found that CIDC schemes have a number of important advantages over CDC schemes.
Researchers professor Hans van Meerten and Elmar Schmidt found that despite both schemes featuring collective asset pooling, CDC schemes leave little room for individual risk management. On the other hand, the study found that CIDC schemes can accommodate such individual risk management and feature less complex rules for asset allocation.
In addition, while both scheme types place the risks on pension scheme members, there being no external risk bearer, there is still greater risk sharing amongst scheme members than in individual defined contribution (IDC) arrangements which is what most private sector employees have in the UK.
As a result, the researchers believe scheme members should be duly informed of their legal position vis-à-vis their employer and pension provider. CIDC schemes feature individual pension accounts, making the identification of a scheme member’s pension pot easier. This is not the same as individual ownership of the pension pot, which (typically) lies with the provider.
Furthermore, the researchers said that the UK’s pension freedoms, which allow people to take their pot as a lump sum, is contrary to the idea of collective risk sharing in CDC and CIDC schemes.
The paper supports a recent submission by Pensions Institute director professor David Blake to the UK’s Work and Pensions Select Committee which argued that CDC schemes might be the only form of collective pension scheme that is feasible in the short term.
Blake said the University of Utrecht paper comes at a crucial time in the ongoing debate around pensions.
“In the Netherlands as in the UK, a discussion questioning the sustainability and complexity of DB schemes and their pension promise is taking place and it is useful for us to learn from their experience.
“CIDC schemes do have an advantage – they maintain individual accounts and are better able to deal with sudden cash withdrawals than CDC schemes, yet are still able to exploit economies of scale to the full which lowers costs through, for example, automatic enrolment and the pooling of investment and longevity risks.”
Therefore, Blake recommends the government examines the feasibility of establishing CIDC – for both the accumulation and decumulation phases.
“Such schemes would be compatible not only with the defined ambition agenda, they would also be compatible with the new pension flexibilities following the 2014 Budget, while, at the same time, exploiting economies of scale to the full and allowing a high degree of risk pooling,” he said.