24 November 2023
CDC has been making a lot of noise in the pensions’ world recently.
We have the highly anticipated second Department for Work and Pensions (DWP) consultation on multi-employer regulations and the anticipated launch of the first CDC Scheme, to be offered by Royal Mail mid-way through 2024. CDC even featured in the Mansion House speech when DWP indicated that they would also consider CDC decumulation only products – another potential welcome addition to the area of ‘post-retirement’ which I think we can all agree needs the most love and attention for DC savers.
I think there is good reason for this excitement. In a world where we are increasingly seeing a transition to Master Trusts for many small and medium sized schemes and a regulatory environment that encourages small DC schemes to consolidate, CDC allows those paternal employers to focus on providing their members with a real (and more tangible?) pension saving solution.
As such, whilst the pensions industry is currently pausing for breath awaiting further regulation, I thought it would be good to reflect on the different employers I believe would find CDC an appealing ‘next step’ on their journey to offering members better retirement outcomes. Because spoiler alert, I think there more than a few.
- Those employers who want to deliver better retirement outcomes for their workforce – it is no secret that almost all academia suggests that CDC could result in better outcomes for members. LCP research supporting CDC clients suggests 50% or better expected member outcomes than DC as a result of being able to hold higher returning and risky assets for longer like equity and benefit from other risk sharing (that is not possible in traditional individual saving mechanisms). Countries such as the Netherlands and Denmark have also been able to provide case studies of effective implementation of CDC with really tangible impacts on member retirement outcomes.
- Those employers who have a large and stable workforce – in the interim whilst CDC is in its infancy a ‘whole of life’ CDC seems the most appealing solution for Schemes that have large volumes of members. Having scale and a broad distribution of members, as well as an expectation of a continued ‘pipeline’ of new members joining their workforce, allows for a more efficient implementation of some of the benefits of CDC, including risk sharing, less requirement for daily dealing instruments, better inclusion of derivative instruments to manage risk and a longer investment time horizon.
- Those employers in industries with transient labour markets – in industries that see significant employee turnover to competitors, CDC could be a really powerful way of differentiating employee benefit packages. It could also lead to a less peripatetic workforce as employees can more tangibly identify with obtaining a proportion of their salary each year in retirement than a theoretical difference of 1-2% contributions that is hard to quantify and is unlikely to shift the dial much in increasing workforce retention. The launch of CDC also demonstrates the employer as having a more paternalistic perspective on ensuring good retirement outcomes for members, which can only be viewed positively by employees. Simplify member pension experience – one of the most seismic changes following the transition from DB pension provision to DC was the onus on the member to select an investment choice, a contribution level, and a target retirement age. CDC requires less difficult member decisions (and therefore less fear of indecision) and provides members with more certainty of benefits accrued compared to typical DC funds where there is the very real fear of single market events making material long term retirement impacts.
- Simplifying member experience is increasingly beneficial if you work in an industry with transient labour markets, given it is likely member investment and savings knowledge is possibly lower to begin with.
Is CDC tickling your ‘collective’ taste buds more than you first thought? Want to learn more? Drop me a line, but fair warning - as I said at the start, we pensions folk are a highly enthusiastic bunch!