What are CDC Pensions?

There are those that argue Collective Defined Contribution (CDC) pensions address many of the issues (for the employer) with Defined Benefit pensions and (for the individual) with Defined Contribution pensions.

It is suggested CDC pensions will deliver a pension that is higher (for the same level of contributions) than a Defined Contribution pension.  It is claimed for those in a Defined Benefit scheme a CDC delivers a “target pension” (not guaranteed) that reduces the employer’s pension deficit risk and therefore ultimately the risk the scheme could fail and fall into the Pension Protection Fund (PPF).

Rather than a defined contribution pension member investing in their own individual retirement fund contributions of all members of a CDC scheme are pooled in a centrally administered fund. It is argued this process reduces costs and builds larger portfolios potentially generating higher returns.

With CDC Instead of a defined contribution pension member purchasing an annuity or going into drawdown at retirement a monthly pension is paid from the combined pension fund. A recent pension policy institute study found that pooling investments could increase the value of a defined contribution pension pot by between 16 and 62 percent.

An independent actuary defines contributions to the scheme over time and works out the rate at which pensions for life can be paid from the assets of the combined pension fund. This is a “target pension” which is adjusted according to the fund’s assets versus liabilities.

Liabilities are effectively members yet to retire. The Collective Defined Contribution (CDC) model is based on intergenerational risk sharing. This is based on mortality risk and effectively means those scheme members who die soonest subsidise those who live long into their retirement.

Versions of Collective Defined Contribution (CDC) pensions already operate in the Netherlands, Denmark and Canada. The legislation is not currently in place to allow CDC pensions to operate in the UK. However, after consultation with its defined benefit pension scheme membership the Post Office has presented a proposal to the government to move to a CDC scheme and discussion is ongoing around how this may be achieved.

CDC’s potentially offer benefits to both pension scheme members and employers but the devil is in the detail. There are a number of thorny issues to be addressed before this type of pension is introduced (if ever) in the U.K.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action.