Also known as a form of “defined ambition” scheme, they differ from Defined Benefit (DB) schemes in that you are not promised a certain retirement income - although as we are seeing often, the company sponsors of DB schemes are not always able to keep those promises. A CDC scheme instead has a target or “ambition” amount it will pay out, based on a long term, mixed risk investment plan. CDCs aim to pay out an adequate level of index-linked pension for life but this is an ambition rather than a contractual guarantee. They have the scope to redefine the benefits they offer if circumstances - like adverse economic conditions - require.
CDC differs from the traditional Defined Contribution (DC) schemes that are largely replacing DB schemes in that it does not produce an individual “pension pot”, which you then have to decide how best to use for your retirement, but invests your savings in a larger “collective” pot, and then provides an income to you during your retirement. Thus, CDC schemes take the big central decision of pension freedoms out of retirement planning, and also much of the risk. In the Budget this week the Chancellor announced plans to “unlock” investment in UK infrastructure through longer term investment in “scale-up”, innovative business: CDCs have been identified as a potential source of this type of investment.
The Committee is launching a new inquiry into merits of this idea, the role that ‘defined ambition’ CDC schemes could play in the pension landscape, the potential benefits to savers and the wider economy, and the legislative and regulatory framework that would be required to make it work.
The Committee’s ongoing inquiry into pension freedoms has highlighted the general level of mistrust and disengagement with pension plans, and it is well known that policy makers are keenly looking for ways to get people to plan and save much more for their retirement.
Advocates of CDC schemes argue that they provide greater assurance of retirement income and more efficient pooling of costs and risks among members than traditional DC, but do not impose the burden of underwriting an onerous pension promise on employers. Studies by the RSA and Aon Hewitt estimate that CDC could have delivered 33% better pension outcomes than traditional DC over the past half-century.
Detractors argue that CDC may further fragment the pension landscape, suffer from lack of demand, and run counter to the trend towards greater individual freedom and choice in pensions.
The Pension Schemes Act 2015 created by the 2010-15 Coalition Government defined “shared risk/defined ambition” or CDC as a distinct pension category. However, regulations under the Act to bring them into effect have not yet been introduced. In October 2015, the Government announced the plans would be shelved indefinitely so as not to distract from other major reforms such as auto-enrolment and pension freedoms.
Rt Hon Frank Field MP, Chair of the Committee, said “What the Select Committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could instead club together and pool the risk themselves.”
The Committee invites evidence from any interested parties on any or all of the following questions:
Benefits to savers and the wider economy:
Would CDC deliver tangible benefits to savers compared with other models?
How would a continental-style collective approach work alongside individual freedom and choice?
Does this risk creating extra complexity and confusion?
Would savers understand and trust the income ‘ambition’ offered by CDC?
Converting DB schemes to CDC:
Could seriously underfunded DB pension schemes be resolved by changing their pension contract to CDC, along Dutch lines?
How would this be regulated and how would the loss of DB pension promises to scheme members be addressed?
Regulation, governance and industry issues:
How would CDCs be regulated?
Is there appetite among employers and the UK pension industry to deliver CDC?
Would CDC funds have a clearer view towards investing for the long term?
You can find full details, and submit your evidence, here: Collective defined contribution pension schemes inquiry
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