Hi Irwin
Collective DC schemes (CDC schemes) are a form of risk-sharing arrangement. In the UK, legislation has only recently come into force to enable them, so UK experience is very limited. However Royal Mail is introducing a CDC scheme. I suspect that, in practice, different schemes will operate differently, but broadly speaking: Like a normal DC scheme, the employer pays a fixed rate of contributions. However members' funds are pooled together to share the risk. Benefits paid on retirement are dependent on the funding level of the scheme and may be subject to variation once in payment.
CDC schemes are more well established in some other countries such as the Netherlands and Denmark. I think one reason they are being introduced in the UK is that modelling has suggested that generally CDC schemes may give members better outcomes than standard DC schemes.
I haven't seen any analysis of how to formulate an investment strategy for a CDC scheme but it seems to me that it would be possible to use a similar approach to that used for a final salary scheme. For example, in the CDC scheme there may be some benefits that are "guaranteed" or at least you really don't want to cut back. The scheme managers need to decide to what extent they wish to invest in assets that match these guaranteed benefits, and to what extent they are prepared to mismatch assets and liabilities in pursuit of higher returns. Higher returns may lead to discretionary benefits being granted.
Even in a final salary scheme there is uncertainty over the level of the guaranteed benefits, eg active members' benefits will be dependent on future salary increases, which are uncertain. So, I don't think uncertainty over the CDC liabilities is a huge issue. As you say, the liabilities can be recalibrated towards the level of the assets. Perhaps this option will allow CDC schemes to take a bit more investment risk in pursuit of higher returns and higher benefits?
I think there are some good articles online about CDC schemes
Hope that helps
Gresham
Last edited: Mar 30, 2022
