CDC pensions outperform DB and DC schemes

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Image: Mikecphoto / Shutterstock

Collective defined contribution (CDC) pension schemes would be expected to average 70% higher than defined contribution (DC) annuities and 40% higher than pensions provided by typical defined benefits (DB) schemes.

That is according to a guide published today by Willis Towers Watson, the company which worked with Royal Mail to develop the UK’s first CDC scheme, which compares anticipated CDC incomes and suitability with traditional UK schemes.

Simon Eagle, senior director and head of UK CDC, said: “We’ve seen increased interest in CDC since the government tabled the Pension Schemes Bill at the start of the year.

“CDC is on track to become an option from next year, and so it is now a more distinct consideration for employers. To help the industry get to grips with this innovation we have published a guide to answer the 15 most commonly-asked questions.”

Willis Towers Watson’s analysis found that employers would typically need relatively large workforces of more than 5,000 for a CDC to be suitable.

Eagle said: “One of the most compelling features of the CDC is that, because pension levels are gradually adjusted to deal with experience, the scheme can afford to target higher investment returns than in most other pensions vehicles without short-term fluctuations in pension cost for the employer or pension level for the members.

“This means that, for a given amount of contributions, for each £10,000 payable from an insured annuity bought with a DC pot, or £12,000 payable from a DB scheme, the CDC scheme would pay £17,000. This helps provide employees with adequate pension levels.

“Initially, employers will only be able to access CDC if they provide it through their own trust. For CDC to become prevalent in the UK we would need further regulation from the government enabling CDC master trusts, so that an employer’s scale is no longer a constraint. In today’s flexible world of work, industry master trusts could be an especially effective way of providing CDC pensions, as members could continue to accumulate retirement contributions in the same scheme when changing employer.”