You can watch the coverage here - http://www.parliamentlive.tv/Event/Index/4387d4cf-c873-4445-a3a0-425a3c6aec52
The debate will likely focus on the following key questions:
What are the purported benefits of CDC compared to individual DC?
Are savers in CDC schemes likely to achieve better retirement outcomes than their counterparts in individual DC?
Why have so few employers to date sought to offer CDC schemes to their workforce?
What, if any, barriers exist to the development of CDC schemes in the UK?
How transparent could CDC schemes be?
How does ‘smoothing’ work and is there a risk of intergenerational unfairness?
Tom Selby, senior analyst at AJ Bell, comments:
“The debate around Collective Defined Contribution provision has been burning for years, dividing opinion among both politicians and the pensions industry. The most ardent supporters often paint a picture of retirement mecca, with CDC savers benefiting from bigger pensions and lower investment volatility.
“On the other side, detractors argue the schemes risk becoming an albatross around the necks of the next generation, with sons and daughters asked to make bigger contributions to pay for their parents’ pensions. Given the Government’s focus on addressing issues of intergenerational fairness in recent years – and particularly following the general election result – a structure which potentially gives the lion’s share of benefits to older workers may not be attractive.
“One of the biggest difficulties CDC needs to overcome is its interaction with the pension freedoms. The structure of these schemes requires members to stay in the scheme until a set date in the same way as with-profits schemes. If members left early, they would likely be hit with a cut in their pension similar to the with-profits Market Value Reduction (MVR) to ensure the entire scheme isn’t destabilised.
“That said, it is positive that the Committee is digging deeper into the viability of CDC schemes in the UK. There may exist a sweet spot where some DB schemes trade down to CDC, while the majority of savers continue to build up individual DC pots. Whether other companies will follow Royal Mail’s lead in investigating CDC as an option, however, remains to be seen.”
Background
The idea of bringing CDC to these shores was proposed by the coalition government back in 2012. Christened ‘Defined Ambition' by then pensions minister Steve Webb, the plan was to create a new breed of pension schemes that sit somewhere between ‘traditional' individual DC and defined benefit. CDC structures already exist in other countries, most notably the Netherlands and Denmark (where, it should be noted, membership has historically been compulsory).
The key difference between CDC and conventional DC is that all assets are pooled, rather than each member having their own individual pot. The fund then aims to give members a certain level of pension from the fund each year - rising in line with inflation - without actually promising or guaranteeing it.
If investment returns are better than expected, then higher increases - or ‘bonuses' - could be provided both pre- and post-retirement. Conversely, if investment returns are worse than expected, then lower increases could be provided or, if things get really bad, benefits could be cut.
If all this sounds a bit familiar, that is probably because it is. The design of CDC just described is pretty much identical to the way traditional with-profits funds operate.
CDC's most vociferous backers argue it could be the Holy Grail of pension provision. This is certainly the picture painted by David Pitt-Watson in a paper for the RSA in 2012 titled Collective Pensions in the UK.
He argues the pooling of investment risk associated with CDC will deliver superior overall returns versus individual DC because a larger proportion of the pot can be held in riskier, return-seeking assets. This, he argues, is because there is no need to shift the entire fund into bonds or cash as you approach retirement as risk is shared between members. Provided money is coming into the fund through contributions, money can be paid out in benefits.
Pitt-Watson also suggests CDC is more efficient because the scheme effectively self-annuitises, thus removing the cost of paying an insurance company to do it for you when you retire.
Strikingly, the paper suggests: "If a typical young Dutch person and a typical young British person were both to save the same amount for their pension; if they were to retire on the same day, and die at the same age, the Dutch person is likely to get a pension which is at least 50% higher than the British one."
It is, however, worth noting that in its consultation on Defined Ambition, the Department for Work and Pensions (DWP) - which was ardently in favour of CDC at the time - was careful to play down such claims.
In particular, it noted estimates of supposed outperformance are driven mainly by lower costs and remaining invested in risk-seeking assets. "Neither of these is inherent to CDC schemes and it is possible to achieve both low costs and to hold risk-seeking assets for as long as desired in individual DC schemes," the DWP concluded.
That said, the DWP did acknowledge the ability to share risk between members "does seem to create more stable outcomes than are possible in an individual DC scheme".