Collective Defined Contribution pension schemes (CDCs) enable savers to pool their money into a single fund to share investment risk and
longevity risk
A longevity risk is any potential risk attached to the increasing life expectancy of pensioners and policy holders, which can eventually result in higher pay-out ratios than expected for many pension funds and insurance companies.
One important ...
. Such schemes became popular in the Netherlands in the early 2000s. CDCs tend to have lower operating costs than smaller individual schemes.
The CDC fund pays a monthly or annual pension income. Pension incomes vary depending on the funding level of the CDC.
Advantages
Following a lengthy public consultation involving 70 contributors from the pension and insurance industry around the world, the United Kingdom
Department for Work and Pensions
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, logo = Department for Work and Pensions logo.svg
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, jurisdiction = Government of the United Kingdom
, headquarters = Caxton House7th Floor6–12 Tothill Stree ...
concluded that CDCs offer the following advantages for consumers:
* They "provide savings and income in retirement option within one package that is potentially attractive to people who are uncomfortable making complex financial decisions at the point of retirement".
* They "enable the sharing of longevity risk between members, therefore providing each individual member with an element of longevity protection without the cost of accessing the insurance market".
* They "allow employers to offer their employees a pension scheme, which offers an income in retirement in the form of a pension from the scheme’s own assets, but without the risks and balance sheet impact of sponsoring a
Defined benefit
Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, ...
plan".
Disadvantages
The key risk facing CDCs is Intergenerational risk transfer where older members are paid too much relative to younger members or vice versa. Whilst many solutions have been proposed for managing this risk, a simple to understand and actuarially fair method to eliminate this risk is to segregate separate age group cohorts into mini-CDCs and to manage these groups as a
Tontine
A tontine () is an investment linked to a living person which provides an income for as long as that person is alive. Such schemes originated as plans for governments to raise capital in the 17th century and became relatively widespread in the 18 ...
.
Examples
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Royal Mail
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, type = Public limited company
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, founder = Henry VIII
, location = London, England, UK
, key_people = * Keith Williams ...
Pension Scheme
See also
*
Tontine
A tontine () is an investment linked to a living person which provides an income for as long as that person is alive. Such schemes originated as plans for governments to raise capital in the 17th century and became relatively widespread in the 18 ...
s
*
Target Benefit
References
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Pensions