CDC: clumsy Dutch construction?
For some in the UK, collective defined contribution (CDC) pensions are a desirable Dutch import that should be applied more widely. Many are sceptical.
What is meant by CDC? When originally introduced in the Netherlands some years ago, CDC was a benefit design that included DB for the membership with a contribution cap for the employer. So benefits would be reduced or increased in line with investment performance and interest rate developments. Since the crisis, and given future accrual is tied to solvency ratios to a significant extent, a large swathe of the Dutch pension system can be said to be CDC.
As Keith Ambachtsheer, director emeritus of the International Centre for Pension Management in Toronto, wrote in his April 2017 Ambachtsheer Letter, the Dutch pension system has become unhealthily focused on short-term investing; requires unnecessarily high asset coverage; and has resulted in a “catastrophic decline in confidence”.
Cardano notes that the five largest Dutch CDC schemes have not delivered inflation linked income to retirees over the past decade.
Ambachtsheer also noted that several Canadian second pillar schemes have transitioned to more adaptive “softer” versions of DB with elements of risk sharing. He contrasted the Dutch “solvency” regulatory approach to funding and risk management – focusing on the cost of buying out the liabilities if the scheme were to wind up tomorrow – with the Canadian “going concern” focus.
In the UK, CDC is possible, pending enabling secondary legislation. Royal Mail intends to introduce the system; while the benefits of current DB members will change, there will be a significant levelling up for the company’s sizeable minority of employees currently in a pure DC scheme.
“The five largest Dutch CDC schemes have not delivered inflation linked income to retirees over the past decade”
But the consensus is that there will be no widespread demand for CDC as a softer form of DB. It also seems highly unlikely that the UK would apply the Dutch “solvency” approach to pension and risk sharing as it drafts the enabling secondary legislation for CDC to work in the UK.
However, there is likely to be demand for variants of risk sharing as a softer form of DC in the UK and other countries like Germany that wish to transition to greater levels of workplace pension saving.
For Prof David Blake of Cass Business School, collective individual DC (CIDC) is a more promising concept. Here the risk sharing element is focused on the retirement component, and we are likely to hear more of CIDC as schemes like NEST develop income drawdown options for those on moderate incomes.
Ambachtsheer is right to emphasise the importance of confidence in pension models. This will continue to be the case as pure DB entitlement falls away over time and there is a greater focus on individual accrual. Risk sharing will most likely be a core component to ensuring this confidence. Precision around terminology will be just as important.
Liam Kennedy, Editor