Reports this morning suggest Chancellor Phillip Hammond will today launch a long-awaited consultation on introducing Collective Defined Contribution, or CDC, pensions in the UK.
The consultation is likely to begin the process of establishing the legal and regulatory framework necessary to allow employers to build collective schemes.
Royal Mail has already committed to offering CDC to its members once the rules are in place.
Tom Selby, senior analyst at AJ Bell, comments:
“The Government is clearly chasing some positive pensions headlines by launching its CDC consultation alongside the Budget. In establishing the framework for such schemes to exist in the UK it is important both the benefits and potential risks are fully explained to members.
“CDC works in a similar way to the old-fashioned with-profits policies that were popular in the UK in the 1980s and 90s. This means that rather than each member having their own individual pot – as is the case with conventional DC – all assets are pooled together and invested collectively.
“The collective fund then aims to provide members with a certain level of pension each year, without actually promising or guaranteeing it.
“Advocates of the schemes argue that by pooling investments, members can share risk between them and, they argue, potentially benefit from higher returns. However, the Government itself has previously noted some of the more extravagant claims of CDC backers – including that returns could be 50% higher than individual DC – should be treated with extreme caution.
“The primary benefits of CDC – the ability to hold risk seeking assets over the long-term while paying low charges – are already available to individual DC members. Individual DC members also benefit from flexibility over how they spend and invest their pot which would not be available to CDC members unless exit penalties were imposed.
“That said if the Government believes there is demand from employers and savers for CDC it makes absolute sense to build a framework to support them. This needs to ensure members benefit from the same levels of governance, transparency and fairness that exist in the conventional DC market.
“It will also face challenges in ensuring the inherent intergenerational conflict that exists in CDC schemes are managed.”
