UK must take lessons from abroad to successfully integrate CDC

At an evidence session on Monday, Baroness Ros Altmann told the committee that the main lesson the UK must take from other countries is the need to “get the communications right”, so that members can understand what a collective defined contribution scheme can offer and, more importantly, what it cannot.

She said that building an effective communications system can help avoid the building up of “unrealistic expectations”, and would accurately convey to members that there “aren’t guarantees” under the CDC model.

Angela Gough, head of corporate pensions at Royal Mail, echoed Altmann’s point. She added that members must have a firm understanding of what the benefits of a CDC scheme are, and an appreciation of the circumstances in which the value of the pension may fluctuate.

In September, Royal Mail launched a consultation for its own CDC scheme — something it hopes to provide in 2022.

On top of effective communications, the need for actuarial advice for “intergenerational fairness” is something that must be adopted by UK CDC schemes, said David Pitt-Watson, leader of Tomorrow’s Investor Programme at the Royal Society of Arts.

He added that in his research at the RSA, a correlation between countries that offered income for life under a CDC system often tended to be the countries with the best rated pension systems in terms of providing protection for people.

“One of the lessons we could learn is that CDC is a good idea, but it’s not straightforward to do,” Pitt-Watson said.

“Given that people are wanting an income for life, CDC does look like the answer to that, because if you do not have defined benefit and if you’re saying an annuity is too expensive, then there needs to be something like CDC that allows people to share longevity risk.”

He noted that this concept is central to CDC. “It means that people who die younger, their funds go to support people that are going to live to be 106, but everybody ends up having an income that will last them until the day they die,” he said.

Simon Eagle, senior director, pensions actuary and GB head of CDC pensions at Willis Towers Watson, added that the main lesson that could be taken from the Dutch CDC scheme is the need for a “feedback loop”, and to repeatedly engage with members to ensure they have a robust understanding of the potential changes in valuation their pension can undergo over time.

He also echoed Pitt-Watson’s point on intergenerational fairness. Eagle said that the Dutch system includes a “risk buffer” in the way pension increases are calculated — something seen as “unfair” within the system as it is “money being held back” rather than being used to provide an increase to a pension, although the UK approach to mitigate this is already within the draft regulation.

In September, the Pensions and Lifetime Savings Association warned that poor definitions in the draft CDC regulations could create a “back door” for unscrupulous employers.