Is the CDC era about to begin?

At a fringe meeting Alex Cunningham, the shadow pensions minister, affirmed his party’s support for CDC, citing the system’s success in the Netherlands as the principal factor.

It is certainly the case that CDC has served the Netherlands well. Each year, the Melbourne Mercer study places that country at, or close to, the top of its index of the world’s best pension systems.

There is already a drive to achieve consolidation within the mastertrust sector, and the logical next step would be to convert them to CDC arrangements

Proponents of CDC point not just to its proven track record across the North Sea, but also to its ability to address some of the existing problems that face conventional DC in the UK.

A single fund, common to all members’ investments, allows risk to be shared between the scheme sponsor and the membership – a key objective of Steve Webb’s defined ambition project.

Lessons from the Netherlands

The payment of benefits as scheme pensions, based on an actuary’s conversion factors, avoids the gilt rate lottery that characterises annuities paid from conventional DC arrangements.

Crucially, research by Aon Hewitt suggests that Dutch pensioners receive higher incomes from CDC schemes than their British counterparts do from their DC pots.

CDC’s detractors are unconvinced, highlighting recent funding problems faced by Dutch CDC schemes, and arguing that the system sees younger members fund existing pensions at the expense of their own longer-term security.

CDC requires the creation of a small number of huge schemes in order to achieve the requisite economies of scale. They claim that British political culture is antagonistic to collectivised systems.

Momentum behind CDC is building

However, CDC has many enthusiastic and high-profile supporters. In the UK, David Pitt-Watson, Kevin Wesbroom and Hilary Salt have long promoted the system’s advantages.

The Labour party’s recent conversion to the cause adds a political dimension to that support, and it is easy to see how CDC could fit into existing pensions policy.

There is already a drive to achieve consolidation within the mastertrust sector, and the logical next step would be to convert them to CDC arrangements.

Any incoming Labour government will have been elected by a younger generation of Corbynites who would not share their parents’ distaste for collectivised pension provision.

Previous attempts to introduce CDC to the UK have stalled – principally because there has not been the political will to change our existing system. The signs are that this is no longer the case. Perhaps the time for CDC in the UK has come at last.

Tim Middleton is technical consultant at the Pensions Management Institute