New research paper from Cass Pensions Institute.
Collective Individual Defined Contribution (CIDC) pension schemes have a number of important advantages over Collective Defined Contribution (CDC) schemes, a new research paper by the University of Utrecht for the Pensions Institute at Cass Business School has found.
In The Legal Differences between CIDC and CDC, researchers Professor Hans van Meerten and Elmar Schmidt find:
- Both Collective Defined Contribution (CDC) as well as Collective Individual Defined Contribution (CIDC) schemes feature collective asset pooling, but CDC schemes leave little room for individual risk management. CIDC schemes can accommodate such individual risk management and feature less complex rules for asset allocation.
- While both scheme types place the risks on pension scheme members, there being no external risk bearer, there is still greater risk sharing amongst scheme members than in Individual Defined Contribution (IDC) arrangements which is what most private sector employees have in the UK. Scheme members should be duly informed of their legal position vis-à-vis their employer and pension provider.
- CIDC schemes feature individual pension accounts, making the identification of a scheme member’s pension pot easier. This is not the same as individual ownership of the pension pot, which (typically) lies with the provider.
- The paper supports a recent submission by Professor David Blake, Director, Pensions Institute, to the UK Work and Pensions Select Committee which argued that CDC schemes might be the only form of collective pension scheme that is feasible in the short term.
Paper comes at crucial time in pensions debate
Professor Blake said the University of Utrecht paper comes at a crucial time in the ongoing debate around pensions.
“In the Netherlands as in the UK, a discussion questioning the sustainability and complexity of Defined Benefit schemes and their pension promise is taking place and it is useful for us to learn from their experience.
“CIDC schemes do have an advantage – they maintain individual accounts and are better able to deal with sudden cash withdrawals than CDC schemes, yet are still able to exploit economies of scale to the full which lowers costs through, for example, automatic enrolment and the pooling of investment and longevity risks.”
Recommendations for Government
Professor Blake recommended that the Government examines the feasibility of establishing collective individual defined contribution schemes – for both the accumulation and decumulation phases.
“Such schemes would be compatible not only with the defined ambition agenda, they would also be compatible with the new pension flexibilities following the 2014 Budget, while, at the same time, exploiting economies of scale to the full and allowing a high degree of risk pooling,” he said.
Read more about Professor Blake’s Select Committee submission