There are ‘significant challenges’ to commercial providers being able to offer collective defined contribution (CDC) to savers, Standard Life has warned.

Speaking at the PLSA Annual Conference, Standard Life head of retirement proposition, Esther Hawley, stated that Standard Life had looked “really quite carefully” into CDC and “at the moment we see some really significant challenges that we don’t see a way around”.

Whilst acknowledging that CDC works as “a niche in the pensions market” for employers such as Royal Mail, “there are potentially insurmountable challenges” for commercial providers to provide it as an option, Hawley said.

“One of our biggest challenges with it is scale,” she stated. “How do you get to maintain the scale that you need in a DC world without defaulting people into it?

"And if you default people into it, how can you justify defaulting people into a solution that they are not going to be able to get out of? As, in order for the pooling of CDC to work, you are going to need people to stay in the scheme rather than allowing them to easily leave.”

Hawley also foresaw “tensions” in how a CDC market would operate in practice, “where there is a misalignment of interests that could be very difficult to manage”.

She gives the example of Royal Mail setting up their CDC scheme so that if life expectancy increased so significantly that the benefits it initially hoped to provide would not be sustainable, they would be able to close that section and instead open a new section with a lower level of benefits, “so that the contributions of current employees aren’t subsidising the pensions of the older people who are no longer sustainable”.

“Now imagine doing that in a commercial environment, where a commercial provider realised that what they are offering is no longer sustainable," she continued.

"As soon as you declare that you are shutting that scheme, suddenly your pipeline of new business is going to dry up, your business model is going to look very different. So, then there is an incentive to push it another year to see what happens. It’s really difficult tensions like that that will need managing."

Another problem cited by Hawley is how commercial providers would sell CDC. “How do you put forward the case that one CDC is better than the other? In a way that gets across the differences, in a way that is understood by the employers who are choosing the CDC schemes and ultimately the members,” she asked.

“So, although CDC is a really exciting area and I do think it has a role to play, as the answer to pensions of the future, there are too many deal-breakers that we can’t see a way around at present,” Hawley concluded.

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