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Will Collective Defined Contribution Schemes take off?

21 Feb 2020, 20:19

https://www.ftadviser.com/pensions/2020 ... -take-off/

Collective defined contribution (CDC) schemes are now on the horizon, with Royal Mail lining up to be the first UK employer to launch this type of scheme, later this year.

Already well-established in countries such as the Netherlands and Denmark, the schemes were given the green light by the then Work and Pensions Secretary, Amber Rudd, in March 2019.

The new schemes aim to bridge the gap between DB and DC schemes.

They may be attractive to companies who are keen to offer a good pension but are less keen on the liability aspects of a DB pension scheme.

CDC schemes provide a regular retirement income by pooling and investing group contributions.

Also known as a type of ‘defined ambition’ scheme, they pay out a target or ‘ambition’ amount, aimed at providing people with a sufficient level of index-linked pension for life.

Unlike DB schemes, members are therefore not promised a specific retirement income.

A force for good

So, are CDC schemes a positive introduction to the range of pension-saving options available?

Sandeep Maudgil, a partner at solicitors, Slaughter and May was one of the experts called to give evidence to the House of Commons Parliamentary Select Committee on Work and Pensions when it considered CDC pensions in 2019.

He says: “Given the demographic issues which this country faces, anything which broadens the space of properly regulated ways in which people are able to provide for their retirement, particularly in a way which enables them to share the investment and longevity risks associated with retirement-benefit provision, has to be a good thing.

Fiona Tait, technical director at Intelligent Pensions agrees there is room for new options in the pensions space, as she says: “It’s always a good thing to look for new solutions, as there have been an awful lot of pressures on DB schemes.

“It is too early to say whether CDC schemes will work, but they have some very strong advocates.

"If they do get off the ground, the have the potential to be useful.”

Possible problems

Some potential issues with CDC schemes are anticipated, however, as Mr. Maudgil says: “The key issue for CDC will be communications.

"CDC has the ‘look and feel’ of a traditional pension scheme – and that is one of its key attractions from a member and union perspective.

"The way the benefits build up is easy to understand, and the fact that they are communicated in pension form, rather than as a retirement account capital sum which then needs to be converted into pension form before someone can understand how much income they will actually have to live off when they retire, is a major advantage over traditional DC.

“But that can also be a drawback if members don’t understand the key difference between CDC and a traditional DB scheme, namely that CDC benefits are not guaranteed.

“This is why the government has always been clear that transparent member communications will be extremely important.

"The Pension Schemes Bill currently going through Parliament addresses this concern by providing that the Pensions Regulator should not authorise a CDC scheme to operate unless it is satisfied that the scheme has adequate systems and processes for communicating with members.

"I expect that The Pensions Regulator will require schemes to make the non-guaranteed nature of CDC benefits explicit to members when they first join, and to remind them of that each year as part of the annual exercise of communicating to members what level of increase (or cut) is to be applied for their accrued benefits for that year.”

Kate Smith, pensions expert at Aegon agrees that communication could be an issue, and that there may be other potential downsides with regard to CDC schemes: “The industry is divided on whether CDC schemes will offer lower charges and greater certainty to savers or if they are just too complex to communicate to members, many of whom will be enrolled automatically.”

Fairness is a consideration issue too, according to Ms. Smith: “CDC schemes pool both investment and longevity risks across members but as we’ve seen from other countries, one generation can end up subsidising another.

"To reduce the risk of ‘intergenerational unfairness’, an individual’s target benefit needs to reflect what they are paying in year on year and also their age.

"Younger members should receive a higher target benefit than older members for the same contribution because of the longer period of investment before retirement.”

Henry Tapper, chief executive of AgeWage also sees potential issues with the intergenerational aspect of CDC schemes: “Young people may feel that they are subsidising the old.

"However, CDC schemes always require a degree of smoothing and with anything collective, there are always winners and losers. People will overall get more out of a CDC scheme because of economies of scale.”

The verdict

So, will they catch on?

Laura Steward-Smith, workplace savings manager at Aviva does not expect them to become the most favoured option, as she explains: “We anticipate that the current DC regime will remain the workplace pension of choice for the vast majority of employers.”

Summing up, Maike Currie, director for workplace investing at Fidelity International says: “The jury is still out on how much of a success CDC schemes will be. It’s very early days, and the product has yet to be fully ratified through the Pension Schemes Bill.”

She adds: “CDC schemes will be definitely worth keeping an eye on as the year progresses."

Will Collective Defined Contribution Schemes take off?

23 Feb 2020, 04:33

The more I look into CDC pensions the more unease I have about them. The article above just adds to the unease. I don’t like the idea of being a guinea pig for anything..... especially, anything to do with my pension provision.
I don’t think I would want to join a CDC scheme if I was in my mid 20s...... after contributing for nearly 50 years what are they guaranteed? Nothing really .... a promise..... an “ambition amount”.
I can see what’s in it for RM....... stump up their contributions (which they are already moaning about) and wash their hands of it........ if it goes tits up....... sorry we’ve met our limited obligations....... tough, enjoy your less ambitious “ambition amount”.
People in retirement who have contributed their whole working life want and deserve to have certainty with their finances........... they don’t want to find their pension income being cut year on year due to the financial vandalism and recklessness perpetrated by greedy city fat cats who quite happily nearly destroyed the whole financial system in 2008 and then demanded bailing out ....... how many of them went to prison for their actions? Any ideas? They were selling investments they knew were toxic but that didn’t matter. As a direct consequence of the continual quantitive easing that central banks have been forced to do to keep the show on the road for over a decade the US is now sitting on an asset bubble time bomb......... the historic average PE of S & P 500 stocks is 15...... the current average PE is 24 :hmmmm :hmmmm :hmmmm ....... what do we think is going to happen in the near future..... (light bulb moment) a 30%+ stock market correction........ hows that going to effect the “ambition amount” of people already receiving CDC pensions....... perhaps we should go and ask the Dutch..... a lot of their pensions are a form of CDC and they are having their pension cut on a yearly basis. Though in their case the pension provision is far more generous than ours to start with...... might have something to do with the fact that their average pension contributions (employee and employer combined) are around 25% of their pay.
I’d just like to state that I am not that concerned about my own situation as I will not be greatly effected by the introduction of the CDC pension because I’m 56 this year and the majority of my pension is (thank God!!) Defined Benefit. My concerns are for people in their 20s and 30s who could contribute all their working lives and through no fault of their own be left in penury in their old age...... because they are working to an “ambition amount” which isn’t even guaranteed when they are actually receiving it. :arrrghhh :arrrghhh :arrrghhh

Will Collective Defined Contribution Schemes take off?

23 Feb 2020, 15:10

renrag40 wrote:The more I look into CDC pensions the more unease I have about them. The article above just adds to the unease. I don’t like the idea of being a guinea pig for anything..... especially, anything to do with my pension provision.
I don’t think I would want to join a CDC scheme if I was in my mid 20s...... after contributing for nearly 50 years what are they guaranteed? Nothing really .... a promise..... an “ambition amount”.
I can see what’s in it for RM....... stump up their contributions (which they are already moaning about) and wash their hands of it........ if it goes tits up....... sorry we’ve met our limited obligations....... tough, enjoy your less ambitious “ambition amount”.
People in retirement who have contributed their whole working life want and deserve to have certainty with their finances........... they don’t want to find their pension income being cut year on year due to the financial vandalism and recklessness perpetrated by greedy city fat cats who quite happily nearly destroyed the whole financial system in 2008 and then demanded bailing out ....... how many of them went to prison for their actions? Any ideas? They were selling investments they knew were toxic but that didn’t matter. As a direct consequence of the continual quantitive easing that central banks have been forced to do to keep the show on the road for over a decade the US is now sitting on an asset bubble time bomb......... the historic average PE of S & P 500 stocks is 15...... the current average PE is 24 :hmmmm :hmmmm :hmmmm ....... what do we think is going to happen in the near future..... (light bulb moment) a 30%+ stock market correction........ hows that going to effect the “ambition amount” of people already receiving CDC pensions....... perhaps we should go and ask the Dutch..... a lot of their pensions are a form of CDC and they are having their pension cut on a yearly basis. Though in their case the pension provision is far more generous than ours to start with...... might have something to do with the fact that their average pension contributions (employee and employer combined) are around 25% of their pay.
I’d just like to state that I am not that concerned about my own situation as I will not be greatly effected by the introduction of the CDC pension because I’m 56 this year and the majority of my pension is (thank God!!) Defined Benefit. My concerns are for people in their 20s and 30s who could contribute all their working lives and through no fault of their own be left in penury in their old age...... because they are working to an “ambition amount” which isn’t even guaranteed when they are actually receiving it. :arrrghhh :arrrghhh :arrrghhh



Great post. In effect RM are hedging their bets with our money. I have said it before that I also am unhappy with the scheme. For one, why an NRA of 67? Yes I know the state pension is moving, but how many people in delivery will last until 67? Discrimination?
What is the investment strategy going to be and are there any plans to "life style" the scheme to protect those approaching 67? Some of those people may have already left the business due to ill health / injury.
What makes anybody actually think it will work when they couldn't, or wouldn't make the previous schemes work?

Will Collective Defined Contribution Schemes take off?

23 Feb 2020, 16:02

heapsy wrote:Great post. In effect RM are hedging their bets with our money.

For RM, it's effectively the same as an individual DC scheme. They just put the money into CDC and the trustees manage it, just as ultimately it's up to the individual to manage their own DC pot.

I have said it before that I also am unhappy with the scheme. For one, why an NRA of 67? Yes I know the state pension is moving, but how many people in delivery will last until 67? Discrimination?

Discrimination? Not in my opinion, it's just the way things are going.
No-one is being forced to work for RM any more than any other company. We can fight for better pay, pensions, terms and conditions, but ultimately we get what we get and if you don't like it, you move on. It's just a job at the end of the day.

The Cwu's original WinRs proposal actually had an NRA of state pension age, meaning an NRA of at least 68 for many.

What is the investment strategy going to be and are there any plans to "life style" the scheme to protect those approaching 67? Some of those people may have already left the business due to ill health / injury.

The Anticipated CDC design booklet says:

100% in Return-Seeking Assets supporting pensions for members until age 67,
Switching uniformly from this position over a 23 year time frame to
100% in Low-Risk Assets supporting pensions for members from age 90 onwards.

What makes anybody actually think it will work when they couldn't, or wouldn't make the previous schemes work?

It's up to the trustees to make it work, not RM!

In my opinion the biggest threat coming from RM is their ability to pay in the agreed employer percentages, considering the state the company is in. The proposed job cuts will make that easier for them, but for how long?

CDC isn't great, we all know that. The thought of being a guinea pig isn't great either, but nothing's being said here that hasn't been said before.

Ultimately it's your choice whether to opt in or out. If it's in, you then have the choice of taking your pension when the time comes and whatever it's worth, or transfer out for the flexible option, effectively treating it as an individual DC scheme.

Personally I think the time to moan is over! It is what it is and it looks like it's coming our way whether we like it or not.

Will Collective Defined Contribution Schemes take

23 Feb 2020, 19:20

Interestingly the bloke from AgeWage states that all CDC pensions require some form of smoothing yet in the literature that we have received from RM in the past they (RM) make great play of the fact that there will be no smoothing in the proposed RM CDC fund.... any under funding/under performance of the fund will be dealt with there and then....... but not with increased contributions from RM.
We are all effectively going to be auto enrolled in the new scheme whether we like it or not. With little or no say in the matter.
The same way that
Section B was closed to new entrants in 1987.
The final salary scheme was closed in 2008.
NRA 60 was changed to NRA 65 in 2010.
How pensionable pay was calculated from 2014.
The “pension block” scheme was closed in 2018.
All of them retrograde and dilutive to our future finances in retirement.
You will have to forgive me RobertT for moaning but it is how I feel when I have my financial future robbed from me by the company I have worked for for nearly 35 years.
Though perversely I would contribute the extra 1% (which would be matched by RM) because that is going to the lump sum part of the scheme..... the only part you are guaranteed to receive. :Very Happy

Will Collective Defined Contribution Schemes take off?

23 Feb 2020, 20:11

I can't disagree with anything you say, and in over 30 years of RM service I've experienced first hand the changes too, but what's moaning about it now going to achieve?

Everything you've listed has happened, and anyone who's taken an interest in their pension provision will already know it.
Personally I predicted the DB scheme would close sooner or later, when I first took an interest 25 years ago, and did something about it!

We will be auto enrolled into CDC, but like any other pension, there is the ability to opt out. Obviously giving up the 'free money' in the process.

I'm not a fan of CDC any more than anyone else is, and I would obviously much prefer that none of the changes to have happened, but looking back at what we used to have won't make any difference.

I see CDC as a genuine attempt to provide a pension rather than just a pot of money, regardless of whether there are guarantees or not. Therefore I would rather be positive about it!

Will Collective Defined Contribution Schemes take off?

23 Feb 2020, 20:40

Moaning makes me feel better Rob :Very Happy

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