A Risk Too Far The Case Against Collective Defined Contribution Pensions
By Michael Johnson
Royal Mail has committed to offering its workers a Collective Defined Contribution (CDC) pension scheme, designed to split the difference between existing Defined Contribution and Defined Benefit schemes.
The CDC idea is winning increasing support. But it is risky, untested and undermines the personal pensions freedoms introduced in 2015
The system risks creating irreversible intergenerational injustice by overpaying pensioners at the expense of current and future employees. It is also unclear whether what is promised to workers is actually deliverable.
Where CDC has been tried overseas it has either been considered a failure, or the particular circumstances are not applicable to the UK.
This paper catalogues the many risks associated with the CDC model, before proposing an alternative structure.
Individual savings pots invested in withprofits funds would have similar performance drivers to a CDC scheme.
The funds would receive contributions from both employees and employer and, ideally, incorporate pension funds’ regulated consumer protections.
The individual accounts would be overseen by NEST, rather than requiring any new structure, with the with-profits funds overseen by an independent body charged with maintaining intergenerational fairness.
This model avoids the complications, uncertainties and risks of CDC schemes, which sits in a regulatory No Man’s Land, while providing a better alternative for those who use it.