CDC must be made attractive and accessible, claims Hymans Robertson

Collective Defined Contribution (CDC) must be made attractive and accessible through a broad range of designs from multiple providers as the market becomes established in the UK, claims Hymans Robertson.

The claims come as the consultancy launches CDC: The pensions industry perspective – a paper drawn from roundtable sessions that heard views from industry bodies, unions, DC schemes, providers and trustees.

The paper looks at key challenges that must be overcome as the market develops and concludes that CDC will deliver better outcomes if it follows this path.

The report also noted that while single employer or sector-based CDC is the most straightforward approach, a non-commercial ‘take-all’ multi-employer CDC scheme would provide both security and an impetus for the growth of the CDC market in the UK.

It also considered how the challenges facing the CDC market emerged and looked at how the design could, and should, develop for CDC to reach the optimal size and shape.

The key challenges – and solutions – were identified as scale, flexibility, and exit strategy.

The firm said that there will be a need for scale to develop CDC beyond the single employer model which will only be suitable for a handful of large employers, adding that an extension to multi-employer will be needed for accessibility.

This, the report said, it is vital for the longevity and investment pooling benefits to be seen and it would work especially well for homogenous industry sectors.

It added that there is a lack of flexibility in regulations that will need to be addressed. If not, it will form a barrier to much-needed innovation and development in the CDC market.

Hymans Robertson also noted that there will be a requirement for a clear exit strategy for schemes that are unable to continue in the long term, as covered in the draft regulations published in the Autumn.

This, it said, will provide confidence for employers and schemes to be early adopters in what is a new market. Stakeholders will need that reassurance before venturing down a new path, it added.

“In reality, in 10 years we could have a handful of large single employer CDC schemes, like Royal Mail, and a similar number of sector-based schemes”

Paul Waters at Hymans Robertson

Paul Waters, head of DC markets at Hymans Robertson, said: “It is great to see that the momentum is powering behind the development of CDC schemes. The launch of the Royal Mail Scheme was a key milestone and the consultation on multi-employer CDC scheme has provided a clear indication that the government will continue to support the growth of CDC.”

However, Waters said this must be done with “eyes open to the challenges that need to be addressed, a willingness to embrace the benefits of a broad range of designs and encouragement for the support of multiple providers”.

He said: “If done properly, it will generate innovation in the market and ultimately provide better outcomes for members — the true goal.”

Waters added that as the market develops and matures, there’s going to be value in having a range of different CDC schemes.

“In our roundtable discussion there was a divergence of views on what the five-year picture will look like. We believe the industry will benefit from a non-commercial take all-type arrangement to provide access for all members and an impetus for the market’s growth. In reality, in 10 years we could have a handful of large single employer CDC schemes, like Royal Mail, and a similar number of sector-based schemes. We also expect to see a number of commercial multi-employer schemes too,” he noted.

Waters said that CDC is still an unfamiliar concept to most people though.

“We need to help people understand and get comfortable with it. As an industry, through CDC we can deliver substantially better retirement benefits that work well for the majority of people. If delivered consciously and carefully it could improve the social contract between generations. It is important to keep at the heart of the CDC conversation the retirement adequacy challenge that CDC can help to address,” he concluded.

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