Collective Defined Contribution (CDC) schemes hold promise for providing cost-effective retirement solutions and simplifying savings decisions, but their adoption and future development in the UK remain uncertain.
The Pensions Policy Institute (PPI) published its ‘Briefing Note 137 – How might CDC develop in the UK?.’ It outlines the current status of CDC in the UK, detailing its development, regulations, and a case study on the Royal Mail scheme. It examines the potential future development of CDC, discussing benefits, opportunities, challenges, and risks, as well as exploring alternatives like multi-employer and decumulation-only schemes.
The Royal Mail collective pension plan, the UK’s first CDC scheme, has been launched, but the future of CDC (Collective Defined Contribution) development is uncertain.
According to PPI, CDC schemes promise cost-effective retirement solutions and simplified savings decisions but demand is low and various challenges in the greater pension landscape may limit their adoption.
PPI suggests that the interaction between CDC schemes and the larger pensions landscape is expected to shape CDC adoption in the UK, emphasising the need for consistency with elements such as automatic enrolment and pension freedoms to facilitate wider adoption. Concerns about timing, regulatory compliance, and the unpredictability of future regulatory changes also loom big.
Additionally, transfers out of CDC plans must be fair and accounted for, as they might have an impact on the scheme’s survival.
According to the report: “Members of CDC schemes will be entitled to transfer out, but will receive a share of the collective fund rather than a cash equivalent transfer value. When identifying an appropriate transfer value, CDC schemes will need to take into account the total value of the fund and its investment and longevity profile in order to be fair to both the transferring.”
The report also suggests that CDC schemes may have an impact on the decumulation market when annuity sales drop. Decumulation-only CDC schemes provide comparable income without the guarantee premium, but they may mislead savers. PPI says that clarity on differences is critical, as is clarifying the CDC’s position regarding annuities and drawdown products.
PPI says the potential of CDC schemes may grow when the Royal Mail scheme is implemented and alternatives such as multi-employer and decumulation-only schemes obtain legal backing.
