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09 July, 2014   |   By Fiona Murphy, Retirement Planner   |   Market News


CDCs: The new kid on the block

Collective defined contribution pension schemes have been causing a stir since they were ‘rubber-stamped’ in the Queen’s Speech last month.

Professional Adviser provides an adviser overview on the subject with input from Andrew Pennie, Intelligent Penions marketing director, Aegon UK and Tom McPhail. Read the full article by clicking here.

Fiona explains how CDC’s, which have been popular in Europe, are designed to pool risks and deliver economies of scale. 

Andrew Pennie said "CDCs can be used to pool risk and drive cost efficiencies, and they have been popular in some European countries.

Certainty of cost will be attractive to employers and the ‘group’ concept could be beneficial to encourage participation, particularly for smaller employers who are struggling with auto-enrolment and lower paid earners."

Aegon suggest that.. "Only the very largest employers – those who continue to run defined benefit schemes – are likely to be interested."


The fact that we have been through auto-enrolment in the UK, might mean that CDC’s are too late to the party!

Pennie warns: "Many employers may well accuse the government of putting the cart before the horse when it comes to CDC schemes as this initiative should have been announced before auto-enrolment began.”

Potential downsides 

A look at the potential downsides of CDC’s showed many areas of concern..

There may be concerns if they perform in a similar way to with-profits funds. Pennie explains: "Benefits are not guaranteed and there is a sense of ‘with-profits’ about the scheme – increasing income when the scheme does well and reducing income if the scheme does not perform, as happened for many Dutch CDC schemes after the last economic downturn.

He continues: "The big downside of CDCs is the lack of sophistication and ability to tailor benefits to an individual’s bespoke circumstances.

McPhail added: "Unlike in a defined contribution plan, where a member with poor life expectancy can get an enhanced annuity, in a CDC scheme they simply end up cross-subsidising the healthier (and often wealthier) members." 

Pennie concluded "Steve Webb is the driving force behind CDC schemes and there is no doubt the CDC initiative will take years to implement. 

"Unfortunately, Webb is unlikely to be in government after the next election and one wonders how this initiative will develop without his passion and involvement."