Administration issues should be fully considered at the design stage of any future collective defined contribution (CDC) arrangements, a paper from the Pensions Administration Standards Association (Pasa) has said.

The report on CDC developments looked at the recent policy and regulatory references to CDC arrangements, indicating where things may be heading next and the likely impact on administration.

Whilst Pasa acknowledged that it is still "early days" for CDC, it stressed that, in addition to commercial and consumer considerations, the impact on administration will be "integral" to ensure CDC arrangements are effective and deliver value for money.

The report stated: "There are different kinds of CDC benefit models and each will require different types of data to be captured, and different systems to be applied in order to calculate, process and administer the chosen benefit design.

"Working on the basis any CDC scheme would require quite a different – and simpler – approach to the current large scale DC arrangements, administration of CDC may more closely resemble the administration of a large defined benefit (DB) scheme in some respects.

"The practical impact of the chosen CDC benefit model on administration must be built into the regulatory framework.

"This will avoid costly mistakes and ensure we end up with a user-friendly product which is sufficiently attractive to marketed commercially. Otherwise, all the effort to get the concept off the ground could be wasted."

In an ideal world, Pasa said that the administration of CDC arrangements will need to be simple and flexible enough to avoid unnecessary complication, and therefore costs, as well as being capable of automation and digitisation.

It also suggested that CDC arrangements will need to be able to work within or alongside existing ‘scaled up’ solutions, which now dominate the automatic enrolment and wider DC market.

It also stressed the need to avoid a solution that relies heavily on input from what could be a limited resource, such as actuaries, advisers and experienced administrators, and to be efficient and future proofed.

Pasa chair, Kim Gubler, commented: “We know it’s early days, but any future CDC model will need to ensure administration considerations are fully considered at the design stage. This will be critical in delivering value for money for pension savers.

“With this in mind, the paper sets out some initial considerations in the context of current knowledge.”

Adding to this, Pasa CDC Working Group chair, Helen Ball, stated: “We expect to see draft regulations for multi-employer CDC arrangements in 2024. These will hopefully shed more light on how the government intends to develop CDC schemes.

It would be helpful to have cross-party consensus on this to ensure the industry can have the confidence to commit to moving this forward.

"Once the headline points have been fine-tuned we can focus on how these arrangements should be administered. Pasa is keen to speak to other groups and organisations to assist with their work as those discussions progress.”

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