Unite mulls launching CDC scheme as unions back risk sharing

CDC was among the proposals laid out in the government’s pension schemes bill, published last month.

The scheme has become established in the Dutch pensions market, but some have highlighted the potential for intergenerational unfairness, and whether in the UK it can achieve the scale needed to be effective.

It is something we might look at, possibly by creating a scheme

Bryan Freake, Unite

Industry figures have speculated unions may increasingly take up CDC as employers close defined benefit schemes. Bryan Freake, pensions officer at union Unite, said the union had considered establishing its own CDC scheme for employers to sign up to.

“It is something we might look at, possibly by creating a scheme,” said Freake. “It’s... on our agenda.”

Tim Sharp, pensions policy officer at the Trades Union Congress, said: “Where we would see the opportunity would be those companies that have large DC pension schemes at the moment, but are thinking, ‘How do we improve retirement outcomes for our staff without necessarily increasing contributions?’”

Sharp added the government would likely need to put its weight behind CDC if it was to be a success.

“The government has taken the right steps in allowing the creation [of these schemes], but for this to take off there needs to be a strong policy push to make it happen,” he said.

Weighing up risk sharing

One of the main points made in favour of CDC has been claims made in a report last year by the RSA Action and Research Centre that CDC would have produced 33 per cent better returns than DC over the 57-year period to 2013.

However, many argue these returns are only achievable with sufficient scale, which may not be easily reached.

Roger Mattingly, director at independent trustee company Pan Trustees, said: “One thing about the CDC market is you have to have the take-out to make it attractive, so you have the chicken and egg situation.”

“It will be a huge challenge for it to take off in a meaningful way and if it doesn’t take off in a meaningful way it won’t take off,” he added.

Others raised doubts that employers would abandon relatively low-risk DC arrangements. “The question is, where’s the incentive for any employer or sponsor to do this,” said John Herbert, head of actuarial services at consultancy Premier.

“It’s difficult to see why they would commit to that when they already moved to a pension arrangement that had a known cost and no further risks associated with it."

Kevin Wesbroom, senior partner at consultancy Aon Hewitt, said there were three main cases in which CDC could emerge in the UK. The most fruitful, he said, would be for a scheme to be set up that employers could sign up to.

“It’s attractive because it’s a degree of separation from the employer,” he said.

Other options could be industry-wide CDCs covering areas such as charities, or single employers looking at setting up a CDC arrangement as a way of improving security for their members with DC schemes, or avoiding going to straight DC when closing their DB scheme.

“We have a few schemes looking at it, from both DC and DB perspectives,” Wesbroom said.

He added that companies with strong union involvement may be more likely to push for CDC as an alternative to DC where DB schemes were being closed.

Jamie Clark, business development manager at pensions provider Scottish Life, said there was little sign of momentum from employers, but this “may be because they aren’t aware of it", as the market needed to develop.

He added CDC would likely be more attractive for larger employers, as “if the DB scheme is being wound down, to replace it with a DC scheme is more of a jump". “For smaller employers, they’re less likely to want the liability,” he said.