From here to CDC?

In this blog, Simon Eagle, Chair of the CDC Working Party, talks about experiences developing CDC so far, and where CDC could go from here.

When the IFoA asked me to write a blog about CDC, my first reaction was to wonder whether I can find an angle not already covered elsewhere by Henry Tapper!  My only hope was to write my own story of how I got involved with CDC, and thoughts on where it might be heading.  So, here goes….

In 2017 I fed into Royal Mail’s discussions with the Communication Workers Union (CWU) about what they wanted for employee retirement provision, the key requirements being to provide a ‘wage in retirement’ at a predictable and efficient cost to the employer.  The resulting design was identified as similar to some overseas schemes known as Collective Defined Contribution (CDC) schemes.  I was at first sceptical, as there were many hurdles to be overcome (not least, a change in the law!), however as we worked through each aspect of the scheme’s design, we found solutions to the obstacles and a Government open to making it possible.

This has been a rare and fascinating project, a chance to create something new, and to go right back to the basics of what retirement provision is trying to achieve.  Once the Royal Mail scheme was designed and tested through modelling, I believed CDC designs would also be attractive to some other employers if the industry supports it, and so to be part of that, I agreed to chair the IFoA’s new CDC Working Party. 

It has been exciting to see CDC go from a fledgling idea, pie in the sky to many, to something receiving much coverage and support in a lengthy debate in the House of Lords last month.

The IFoA has a key role to play in the development of CDC.  First of all, as something new, CDC design will benefit from thought from a diverse group of people, and the IFoA’s CDC Working Party and conferences can help to facilitate that.  Secondly, actuaries will be crucial to the running of CDC schemes, and therefore must have a say in the design of the new legislative framework. Each CDC scheme’s design can be simple in many respects, but the distinguishing feature of CDC and the difficult part is ensuring the benefit adjustments will be continually appropriate for the funding health of the scheme and intergenerationally fair, and this will be based on the actuaries’ work. 

The IFoA sets practising requirements for actuaries and it will be important to ensure actuaries are suitably qualified for a CDC scheme actuary role.  The IFoA have set up a CDC Regulatory Working Party to investigate this and make recommendations.

So how is CDC shaping up so far?  The most informative development to date has been the release of the Pension Schemes Bill.  I believe that overall the Bill provides a good framework for the running of CDC schemes.  A crucial part of the continual testing of a CDC design will be the actuary’s assessment of viability – whether the scheme design is “sound” – and the Bill leaves it to forthcoming regulations to explain what this means.  Last month a group of us from the IFoA’s CDC working parties debated with DWP some different approaches to assessing this.

CDC is now at an embryonic stage in the UK, and it is impossible to tell what it might look like in 5, 10 or 20 years’ time.  Could we go ‘from here to CDC’, with becoming prevalent in the UK?  This would need demand and supply.  At this early stage it isn’t clear whether that demand would come mainly from employers, unions, employees, or DC savers.  For supply, actuaries will need to be ready to work with employers to help them set up their own CDC trusts (or add a CDC section to an existing trust), if they’re willing to invest the time to get it authorised by the Regulator.  In the longer term, the launch of CDC master trusts could open up the supply side, making CDC readily accessible to employers of all sizes; for that, master trusts would need to work with DWP to develop the rules for that new marketplace.

I’ll leave you with something to ponder.  If an employer asked you now for advice on their retirement provision options, what would you say about CDC? 

If you want to contact the IFoA with your thoughts on CDC, please email Catherine Burtle on Catherine.Burtle@actuaries.org.uk