The future of pensions in the social housing sector

21 March 2023

In 2019, membership of Defined Benefit pension schemes fell below one million for the first time. How did we get to this point? After all, the tradition of paying a guaranteed pension for life goes right back to the 1880s, when Joseph Rowntree founded one of the first workplace pension schemes.

As the costs and risks have escalated, many employers have no longer been able to provide Defined Benefit pensions that pay employees a lifelong retirement income. We’re now in a situation where the majority of employees in the private sector have a savings account – an individual Defined Contribution (DC) pot – rather than a guaranteed pension for life.

The mixed provision of DB pensions and DC arrangements presents a number of challenges for employers and their employees, notably:

• Risks – The shift from DB to DC transferred pension risks from the employer to the individual scheme member. Without a guaranteed retirement income, individuals are entirely responsible for their investments, and how they spend their pot of savings (not least making sure they don’t run out of money).
• Reliability – DB presents very real difficulties for employers, who need predictable costs and risks. Employees need reliability too, but with DC it’s hard to work out how much money they’ll get from their pot when they retire.
• Difficult decision-making – With DC, individuals often struggle to decide how much money to save, where to invest it, and how much money to spend in retirement.

What do employers and their employees want from pensions?

As employees, we all want a pension that’s reasonably predictable, paying us a retirement income regardless of circumstances. Like employers, we also want reliable costs. In our case, we want a stable level of take-home pay, with no sudden hikes in contribution rates. And we’re uncomfortable about having to shoulder all the risks, such as investments and longevity, individually. We don’t want to run out of money before we die.

Like many employers in the social housing sector, Thirteen Housing Group is keen to provide reliable pension benefits to its colleagues, as Heather explains in the presentation. High quality pension provision is a valuable tool for recruitment, retention and retirement. At the same time, fixed costs are important for employers everywhere, especially where business planning is concerned.

What is CDC?

The Pension Schemes Act 2021 gives the UK a legal structure for Collective Defined Contribution, or CDC. This is a type of pension scheme that already exists in some form in the Netherlands, Denmark and Canada.

With CDC, costs are fixed at the outset, when the scheme is implemented. So both employers and employees know what the costs will be from the beginning. This means no deficit contributions and no sudden increase in costs following a valuation. Instead, at each valuation, predicted benefits are adjusted if necessary to reflect the results of the valuation.

CDC promises to take us back to the original aims of an occupational pension scheme – a reliable income for life. We build up a target benefit, which may change but will be payable for the rest of our lives, in a similar way to DB.

Employers get the cost certainties and risk reductions they’re looking for. And CDC also provides a solid recruitment and retention offer, as Heather points out. The benefit may not be fully guaranteed, as it is with a DB scheme, but it will be a lot more predictable than DC.

The collective aspect of CDC is crucial. In CDC pension schemes, the risks are shared across all scheme members. For example, by pooling investments collectively, a strategy can be set with higher expected returns, meaning better and more predictable benefits for members.

Finally, and perhaps most importantly from a member perspective, those difficult decisions are eradicated. Individuals will no longer have to manage their pot single-handedly. CDC lifts away those complex and intimidating investment choices. Once again, people can join an organisation and pay into a pension scheme, with the reassurance that the pension will pay them throughout their retirement.

Where do we go from here?

CDC is well on its way. Royal Mail is setting up the first CDC scheme in the UK, due to be launched this year. Government is currently consulting on multi-employer CDC schemes, so that could soon become a reality as well.

Across the housing sector, CDC presents huge potential gains for larger, paternalistic employers.

We’re keen to gather together like-minded individuals such as Heather to explore the future of CDC in the housing sector. If you’d like to join us, please get in touch with me via the link at the end of this article.