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Collective defined contribution (CDC) schemes are more likely to prove popular with larger companies seeking to close their defined benefit (DB) plans, according to a leading credit rating agency.
Fitch Ratings has argued that CDC arrangements are “more likely to be adopted by larger institutions, including public-sector organisations and private-sector corporations, to replace DB schemes that have proven onerous for employers”.
Such schemes are being heavily debated in the UK following the Royal Mail’s decision in February to introduce a CDC plan to replace its defined benefit scheme.
Christophe Parisot, managing director of international public finance at Fitch, said: “For CDC to be a viable operation its member pool needs to be large enough, or a multi-employer setting needs to be available, so that it can benefit from effective risk-sharing and economies of scale.”
CDC plans – also known as ‘defined ambition’ funds – are already popular in Canada and the Netherlands, albeit in slightly different formats compared to what has so far been put forward in the UK.
Sir Steve Webb, former pensions minister, attempted to steer them into legislation in 2013 – only to be stymied by a subsequent departmental desire to concentrate on at-retirement reforms instead.
They returned to the spotlight earlier this year following the UK postal service’s agreement with the Communication Workers Union, which broke the deadlock over the closure of DB scheme to future accruals.
However, while employers might welcome the new savings vehicle, many of the UK’s leading unions warned recently that CDC plans should not be seen as an ideal replacement for DB plans.
However, the TUC, which represents 50 UK unions, said CDC pensions might be an improvement for people in standard defined contribution (DC) schemes.
“[CDC] pensions could bring these savers benefits of scale, improved investment returns and a secure income in old age,” said Tim Sharp, TUC pensions officer.
“Good-quality defined benefit schemes are valued highly by workers. Every effort should be made to ensure those schemes that remain continue to be open to new members.”
However, in Fitch’s report, it said employers that had already switched to DC were “much less likely to switch to CDC, given the added layer of complexity of running such schemes and the potential for controversy and reputational consequences if something goes wrong in the scheme”.