In the UK, the dispute between Royal Mail and CWU over future pension provision led to the parties agreeing to consider a collective defined contribution (CDC) scheme. The CDC scheme has many similarities with pension schemes in Canada, Netherlands and Denmark. As early as 2021, the law is due to change thus allowing UK employers to open a CDC scheme for their employees.
Employers providing workplace pensions will then have three options:
- Defined Contributions – effectively a collection of individual accounts or Individual Defined Contribution arrangements (IDC’s)
- Defined Benefits – the more traditional option providing guaranteed pension income based on years of scheme participation
- Collective Defined Contribution Schemes or CDC’s providing targeted pension benefits
In a CDC pension scheme, employers pay a fixed rate of contributions and in return the members receive a pension with variable increases. It is different from and Individual Defined Contribution (IDC) scheme where each Member has an individual share of underlying assets. It also differs from provision of guaranteed pension for each year of service as with Defined Benefit scheme, although being targeted to provide such a benefit, the CDC has a similar look and feel to it.
Why a CDC?
Retirement benefits emerging from CDC schemes are expected to average 70% higher than defined contribution (IDC) annuities and 40% higher than pensions provided by typical defined benefits (DB) schemes according to a guide by Willis Towers Watson.
According to the same guide, collective investments spread investment and longevity risk across the membership and allows the effect of market movements to be smoothed out over time. A CDC scheme can invest more efficiently than an individual member can, in assets that can generate higher returns and have a longer time horizon. And as opposed to an individual DC scheme, a CDC scheme cushions the member from a dip in the value of a member’s pot.
How does a CDC work?
A CDC scheme calculates an agreed target level of pension for the member and their dependants. In retirement, the pension is paid directly from the scheme, no annuity is purchased, and no funds are ringfenced for drawdown specific to an individual member. The fund pays annual pension income, dependents pensions and transfer values for leavers. Funding costs are fixed, and risk sharing seeks higher returns. Be warned though, issue arises in ensuring that members understand that unlike DB schemes, CDC benefits are not guaranteed.
What software solution capabilities do CDC’s demand?
- CDCs require a full administrative portal with access for advisors, employers, payroll, and employees
- Systems must be able to configure, quote and install (New Business and registration with TPR, HMRC etc.) CDC schemes and add members.
- Auto enrolment capabilities enabling straight through processing and an uptick in completed applications
- Scheme and member level management processes must be available to administrators
- Scheme benefit categories need to be supported across all the organization
- Ability to automatically manage high volume group collections and reconciliations
- Contribution “Tranche” management per month down to member level
- Investment Funds Administration
- Ability to make regular outbound payments to retired Members, with Income tax deduction and accounting.
- Regulatory Reporting, audit trails, actuarial calculations and reviews capabilities
- Integration with BI/MI
- Enable treatment of Members as individuals, taking account of the stage they have reached in their working life
This list is not complete and new features and and new requirements are always being added to the equation.
Any policy administration system for life and pension requires the ability to deal with complex calculations, regulations and yet still be easy and accessible for end-users to use. CDCs are shiny new pension plans with promises of good returns. But each individual needs to decide what is best for their unique future, and need easy access to information in a way that enables them to understand the implications of decisions regarding their benefits and guides them at key points in their lifetime. This is not a “nice to have”, it is a regulatory requirement.
The same goes for life and pension insurers who are searching for the best way to meet customer expectations, reduce costs, increase operational efficiencies through automation and guarantee success today and tomorrow with a plan for digitilisation.