CDC schemes a 'long shot' for improving member outcomes

Using collective defined contribution (CDC) schemes to improve outcomes for defined contribution (DC) savers is a “long shot”, according to LCP partner and head of DC, Laura Myers.

Speaking at the Work and Pensions Select Committee’s meeting discussing its inquiry, Protecting pension savers – five years on from the Pension Freedoms: Accessing pension savings, Myers highlighted demand and member understanding as the key obstacles for CDC schemes.

She stated: “Anything that has the benefits of risk pooling is a good thing, because one of the key things with DC is that we have passed on the risk to the member. However, I think there are quite a few challenges that probably lead it towards the long shot point.

"One of them is demand, as we have not really seen a significant amount of this from any corporates that we work with.”

Myers continued: “Probably the main issue is member understanding. Members do want certainty in terms of retirement and we have seen that in the past in terms of profits, if you look to the Netherlands for example, that members don’t understand the point that their income could decrease. I think that is going to be a key issue if we go down the CDC route.”

Other issues she cited included how a CDC scheme could be started as providers would have to put “quite a bit of money” into the schemes.

AJ Bell senior technical consultant, Rachel Vahey, agreed that there was a problem with members’ perceptions of CDC schemes, stressing the need for clear communication as she called the promise of income that savers might receive from the schemes “vague” in comparison to that offered by defined benefit schemes.

It was also suggested that CDCs be utilised by master trusts during savers’ decumulation phases as a means of pooling risk, rather than earlier in their lifespan.

In this vein, Aon head of UK retirement policy, Matthew Arends, argued that CDC schemes would add something “distinctive and original” in terms of options for members, citing Aon's findings from earlier in 2021 that 60 per cent of members desired for retirement income for life despite the lack of popularity of annuities.

He continued: “There is a demand there that is not being met. Personal longevity risk is a crucial point. This is an important and, in my mind, not well understood risk that each individual bears but that CDC addresses.

“As for master trusts, I think they have a big part to play in the future of CDC in this country, because they would be the vehicles by which smaller employers and possibly even the self employed could access CDC savings.”

Arends acknowledged that CDCs were still in their “early stages” but stressed that they had “an awful lot of helpful characteristics to offer savers”.

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