CDC back in focus as Budget drives pensions review by UK firms

The Budget has shifted the pensions landscape once again and employers are now reviewing their pensions arrangements. On Budget day last month the Chancellor, Rachel Reeves, announced that from 2029 the National Insurance saving on pension salary sacrifice will be capped at £2,000 a year. That move creates a cost-pressure moment for employers because many contribution structures will become more expensive to operate, prompting firms to look again at how their workplace pensions are designed. That’s where CDC comes in and why it’s back on the agenda. We’ll speak to pensions expert Tom Barton about ‘Collective Defined Contribution’ and why might be a good option to consider.

A reminder. Salary sacrifice allows employees to give up part of their salary in return for a pension contribution of broadly equivalent value, reducing National Insurance for both employer and employee. Most employers currently operate a standard defined contribution scheme, where each employee builds an individual pension pot and the employer pays fixed contributions, often using salary sacrifice to reduce NICs costs. The Budget, however, has caused a rethink with CDC now being actively considered. CDC is still a form of defined contribution, but it operates differently from the individual-pot model most employers are used to, and with commercial providers entering the market, it’s becoming accessible in a way it hasn’t been before.

For HR teams, the interest lies in what CDC could mean for outcomes in retirement, workforce planning, and cost – modelling by the pensions industry suggesting it could offer materially better outcomes than traditional DC pension schemes and help offset some of the cost pressures created by the Budget.

So let’s hear more on this. Tom Barton is a pensions expert and earlier he joined me by phone to discuss it. So what is CDC, and how does it work?:

Tom Barton: “I won't go into a huge amount of technical detail on this. It's just a different form of delivery vehicle for pensions – DC plus, I would call it. So, with DC you know what contributions you're paying, and that's the benefit. CDC, very similar, you know what contributions you're paying, a benefit for employers, therefore. The C bit of CDC is that it's invested a bit differently. It's invested on a pooled basis, rather than a member pot basis and that, supposedly, along with mortality pooling, creates a better outcome for members. So depending on what you read, you might read anything between a 33% uplift compared to normal DC, or up to even a 60% benefit. Now we don't run those numbers so you'd have to test that for yourself but that's the purported benefit of being collective rather than individualised pension saving, pension delivery. So a better outcome, but what is the outcome? It's income. So a CDC scheme isn't just a savings plan, it actually delivers an outcome for members too, and that's what the current government is really fixed on. They want pension savings to deliver pensions income throughout retirement, a bit like a DB scheme used to do, a bit like annuities, but this one doesn't have a guarantee, it just aims to deliver this which is why the contributions, you know what those are, those are set. The Royal Mail has done it, a few other employers are doing it, and the really big uplift on this market is that it's about to become a commercial market. So you don't need to run your own CDC scheme, you can just jump on board with a commercial provider and they'll do it for you, and you just pay the contributions to them so it’s becoming a viable option. Now, it’s very much in its infancy, but it's becoming a viable option for employers to think about and if you're thinking about contribution structures and how to harmonise all that, it's probably not a bad idea to also think about, well, what's our delivery vehicle, too? What suits us as an employer, and does CDC play a part in all this.”

Joe Glavina: “I gather modelling work by the pensions industry shows CDC could offer significantly better outcomes. So what should HR be aware of?”

Tom Barton: “The really key thing for any HR team to think about in relation to pensions is whether this is giving people a retirement outcome that allows them to retire when it suits them and suits us as a business. If the purported benefits to members, to the workers and their outcomes, these additional percentage uplifts, are correct, then that might help HR strategy in helping people to retire at the right sort of time for the business and helping people retire for the right sort of time for them. So that's really worth thinking about. Now we then loop around to what's just happened in the Budget, as well, as to why it's not a bad time to start thinking about CDC as an option too from a cost perspective for employers. Now, if you know you are going to lose the financial benefit of the of the National Insurance position with the chopping and changing of salary sacrifice, you know that your current contribution structure is going to become a bit more expensive. So one thing that some employers are starting to think about, and this is something the industry is now starting to think about, is whether, you could dial down your existing contribution levels a bit to recognise the additional National Insurance contribution cost, but still deliver people either the same, or even better, benefit outcomes in retirement and the thought is, well, if you're paying, say, 10% to a conventional DC scheme, maybe dial that down to 9% but pay it to a CDC scheme, and if the reported benefits of CDC are correct, then you might be able to give people a better retirement outcome but at a lower cost to you, or at a neutral cost to you factoring in the removal of the NICs benefits. So that's the thought process at the moment and it's why I say that maybe don't just think about the contribution structures at the moment, think also about the delivery vehicle that you're using as the workplace pension scheme. Think about whether CDC is an option for you, and maybe the NICs changes is a reason that it becomes an option for you.”

Tom and the Pensions Team are currently helping a number of clients to conduct a thorough review of their pension arrangements, including the viability of CDC. If you would like help with that then please do contact Tom - his details are there on the screen for you. Alternatively, of course, you can contact your usual Pinsent Masons adviser.