Stephen Tiley: CDC schemes such as those being pioneered by Royal Mail could provide a model that suits the vast majority of UK consumers
Collective defined contribution (CDC) could be a “sustainable, sensible and workable” pensions model that could suit the vast majority of UK consumers, Stephen Tiley says.
Writing in a personal capacity, the pension manager and trustee said he "strongly believed" the CDC model should work well over the long-term for most ordinary pension contributors in the UK – noting it was proven to be successful in other countries and adding there was "no reason" why it should not work well in the UK.
He said back testing by organisations such as the Pensions Policy Institute, Aon and First Actuarial have suggested a 30% improvement to retirement incomes could be expected compared to a typical defined contribution (DC) scheme targeting annuity purchase.
He explained: "The concept offers value through mortality risk pooling, economies of scale in investment (one common investment fund) with access to illiquid investments, infrastructure and property; and a longer investment time horizon with growth assets being held for longer."
Tiley said CDC also takes away the stressful decisions members are expected to make in DC schemes that many members prefer not to even consider – noting this often leaves many in default investment strategies where this "one-size-fits-all approach is often sub-optimal".
He added that some employers will have several legacy arrangements with higher charges – noting that often too little is invested in reviewing and improving member outcomes in these schemes.
Tiley concluded: "The cost of trying to educate and motivate ordinary people to engage with their pension schemes and make sensible decisions is just too great, and it doesn't really work.
"Folks need an income in retirement to supplement their State Pension. Yes, flexibility and bridging pensions are going to be useful, but let's keep it simple and stop wasting money, time and effort pedalling one traditional DC scheme after another – let's work towards CDC master trusts and other large occupational CDC schemes such as being pioneered by Royal Mail and others that have realised we as an industry need a sustainable, sensible and workable pensions model that suits the vast majority of UK consumers."
This article was published as part of Professional Pensions' PP Pensions Commission – which is bringing together industry opinion and ideas on the future of pensions to send to the new government
Send your thoughts and ideas to the PP Pensions Commission via email to [email protected] by 19 July
