Will Collective Defined Contribution plans get out of first gear?

The new Collective Defined Contribution (CDC) plans, which were announced in the Queen’s speech today, may offer cost savings for pension savers.  We are sceptical whether they will ever get off the ground in the UK.

We live in a post-Defined Benefit (DB) world, where many FDs continue to rue the day their predecessors agreed to the open ended pension commitment of such schemes, and, where behind the scenes they continue to place considerable financial strain on many of the country’s employers. Most private sector employers closed their DB schemes over the last ten to fifteen years replacing them with DC arrangements, with comparatively lower levels of contributions.

While the industry discusses the merits of the system the elements that smell of with-profits, the cross generational subsidy, whether pensioners will be 30% or 50% better off, the real issue is: will employers want to adopt these systems? For three major reasons we think they won’t:

 

1.  It isn’t DB but it is a bit like DB.

 

A feature of Collective DC is an “aspiration” of a benefit at retirement which could be perceived as a defined benefit by members. With those expectations could come moral imperatives for some employers. It is unlikely that employers that bear the scars of DB would embrace these new risks with open arms.

 

2.  What about the flexibilities to be introduced from April 2015?

 

Which employer wants to explain to their employees that they are entering into an arrangement that removes all the new flexibilities that have been trumpeted by the press and have just come into force for an ‘aspiration’ they will be better off in retirement.

 

3.  Auto enrolment has already made DC the pension scheme of choice.

 

Many employers have been forced to review their provision and put something into place to meet their auto enrolment requirements. Will they want to undo that work and adopt a CDC approach? It is unlikely.

 

I am not against CDC and believe that we will come full circle and reappraise defined benefit provision in the future (perhaps long into the future) but fear that CDC has come too late. The Government should ensure their focus remains on repairing the active membership phase of DC provision to keep charges competitive, improving governance and ensuring knowledge and financial education is as good as possible to give individuals the skills to make informed choices.

David Brooks

Pensions Consultant

Telephone: +44 (0)20 7893 3456

Email:  contactus [@] broadstoneltd.co.uk