CIDC schemes provide best pension scheme model

Collective individual defined contribution (CIDC) schemes might be the only form of collective pension scheme that is feasible in the short term, according to Professor David Blake, Director, Pensions Institute, Cass Business School.

In a submission to the Work and Pensions Select Committee inquiry on collective defined contribution pension schemes, Professor Blake suggests that CIDC schemes might be possible, following the introduction of ‘freedom and choice’.

“CIDC schemes maintain individual accounts, they 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, e.g., through automatic enrolment and the pooling of investment and longevity risks,” said Professor Blake.

Professor Blake said there are three key features of CIDC schemes that are specific to each individual member and which make the scheme easy to understand:

1. The CIDC scheme maintains individual accounts for all members in the accumulation phase, so it is easy to value each individual’s pension pot;
2. The contribution rate is set to be actuarially fair to each member, implying that there is a direct relationship between the contributions that an individual pays into the scheme and the pension they eventually receive. This contrasts with CDC schemes in which contributions are averaged on a collective basis to meet a target average salary pension;
3. Each individual has their own de-risking investment strategy in the lead up to retirement.

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.

Professor Blake’s submission is based on his Independent Review of Retirement Income which can be read here.