BROADSTONE: CDC creates a new pensions dilemma for employers but may help the Government in the long term


The establishment of a framework to allow Collective Defined Contribution schemes to be introduced is an interesting (if a little awkwardly timed) step. The Government, despite the announcements in the Budget, clearly still values some level of certainty for individuals in retirement and are keen for employers to establish these schemes and share the risk with the employees.

The proposed pension bills will give employers and employees a new dilemma by introducing a third type of pension scheme, ‘Defined Ambition’. Employees may be keen that employers share the risks associated with investment returns and living too long in retirement that this new type of scheme offers. Employers, who may still be struggling to meet Defined Benefit liabilities may be understandably reluctant to enter into a new round of pension promises.

Simon Nicol, Pensions Director at Broadstone Corporate Benefits commented “On top of the myriad of pension changes still facing employers they will not thank the Government for throwing this unexpected curve ball. It is difficult to see many employers being enthused about introducing yet another and unfamiliar pension arrangement. If the basic aim of these proposals is to get people saving this added complication from the Government could well end up being counterproductive.”

Nicol added “Although we also suspect there may be other longer term motives to introducing this type of scheme. For instance, the Government has been concerned that the new flexibilities for DC savings could have an impact on the long-dated gilt market because:

1. The annuity market reduces; and 
2. The potential impact of members in DB schemes transferring their benefits to DC to access the new flexibilities.

However, it will be sensible for CDC schemes to have some investment in long-dated gilts to match the liabilities and this may help reduce the potential damage. It is also possible that further changes to the public-sector pensions could be made to adopt the CDC model.”