Launch of CDC could be a Red Letter day for pensions – but now CDC needs to be an option for millions more people
Pensions & benefits CDC strategy and implementation Corporate strategy Policy & regulation
On Monday, the Royal Mail will launch a new Collective Defined Contribution (CDC) pension scheme for over 100,000 postal workers, the first scheme of its kind in the UK. A CDC scheme offers an alternative to traditional Final Salary and Defined Contribution schemes with fixed employer and member contributions and the potential for significantly higher pensions at retirement.
Steven Taylor, LCP’s Head of CDC said:
“The launch of Royal Mail’s new Collective Defined Contribution (CDC) pension scheme could truly be a “Red Letter” day for pensions.
For many of today’s savers, employers and for Government, the hope is that CDC pensions could be something of a panacea, helping to simultaneously solve many problems across the economy.
For savers, particularly those currently in traditional lower cost Defined Contribution schemes, CDC offers the hope of receiving far more “bang for their buck” in retirement. Scheme designs vary, but previous LCP research has estimated CDC can potentially offer members up to 50% higher expected pensions per £ contributed than traditional DC schemes that annuitise.
The secret to this is in investment pooling and collectivization, which means schemes can more comfortably invest for the long term than most members could on their own. For today’s savers some of these benefits can be replicated using drawdown products. However, CDC could be preferable for large segments of the population, especially those that do not want to make complex decisions about managing their savings deep into retirement. The long-term investment approach also makes CDC schemes natural buyers of productive finance assets that government would love to see in the hands of UK pension schemes.
For employers who are increasingly competing to attract and retain the best staff, this also means an ability to enhance reward strategies by providing better quality pensions, all within current pensions budgets and without the thorny risks of deficits that have in the past plagued defined benefit schemes.”
Helen Draper, Partner at LCP said:
“We welcome the long-awaited launch of the Royal Mail’s Collective Pension Plan, the first CDC scheme in the UK. We believe CDC offers distinct advantages to traditional alternatives, giving the current generation of pension savers a better opportunity to replicate the benefit levels of generous Final Salary schemes, which otherwise could require a significant, and often unaffordable, uplift to member or employer contributions. From working with our clients, this development can be expected to propel CDC much further up the pension and reward agenda for many of the UK’s largest and most paternal employers.
Given the significant advantages CDC schemes could offer to savers and the wider benefits to the UK economy in terms of investment in productive finance, we believe making CDC schemes accessible to a wider population of UK pension savers should be a priority. We expect the Government to shortly unveil new regulations that would enable the wider roll-out of these schemes, potentially creating a real shift in the pensions landscape.”
