Robust design and high quality communications must be priority for new CDC pensions

27 March 2023

The extension of collective defined contribution (CDC) pensions schemes will be a positive development as long as there are sufficient protections to ensure the new types of CDC schemes have robust designs and high quality communications. That’s the view of the Institute and Faculty of Actuaries (IFoA) in its consultation response to the Department of Work and Pensions on extending opportunities for CDC pension schemes.

The IFoA believes that CDC schemes have a lot of merit, providing a cost-effective retirement income for life and avoiding the need for individuals to make complex pensions management decisions. However, access to unbiased information for those considering joining a CDC scheme, whether employer or employee, will be critical to its success.

Simon Eagle, Chair of the IFoA’s CDC Pension Working Party, said: “Defined contribution (DC) pensions are currently the only option in the vast majority of workplaces outside the public sector, but leave the individual to shoulder all the risks and make all of the management decisions. The IFoA’s recent work on the Great Risk Transfer highlighted the difficulties of planning for retirement when you don’t know how long you might live, how much to pay in, how to invest your savings or how quickly to draw the money out.

“CDC schemes are a new option whereby pensions are managed by trustees, risks around investment and life expectancy are pooled between members, and costs are fixed for both employers and members. The IFoA supports the continued development of multi-employer arrangements for employers who want to offer ‘whole of life’ CDC without having to set up a scheme themselves. Further, we believe there is high demand for ‘decumulation CDC’; this would allow DC savers in standard DC schemes to turn their pot into an income for life which would not be guaranteed like an annuity but which would be expected to be much higher.

“The new CDC schemes will need to be designed robustly, so that pension levels change in a fair and justifiable way in reaction to changes in markets and member lifespans. In addition to providing unbiased information at the outset for those considering CDC schemes, there must be ongoing high quality communication to create trust in the system and help members understand the risks and advantages of the scheme they are in.”