The Legal Differences between CIDC and CDC

Abstract

Both Collective Defined Contribution (CDC) and Collective Individual Defined Contribution (CIDC) schemes place any risks on pension scheme members instead of an external risk-bearer. In CDC schemes, assets are pooled collectively, allowing for risks to be shared between pension scheme members. In Individual DC schemes (IDC), the scheme members bear such risks individually. But CDC’s collective nature leaves little room for individual risk management and the pension assets are allocated to scheme members via rules that are often complex and ambiguous. CIDC schemes strive to retain the desirable aspects of CDC and IDC schemes, while improving on some of the drawbacks. The drawbacks of a CDC scheme are mitigated by the introduction of 1) individually quantifiable pension pots through individual accounts, 2) individual risk management and 3) a simplified scheme. The drawbacks of an IDC scheme are mitigated by 1) mandatory participation, 2) collective management of assets, and 3) sharing of risks. It therefore seems that CIDC schemes have a number of important advantages over CDC schemes. CIDC scheme members should be clearly informed of their legal position vis-a-vis their employer and pension provider, and the contract should clearly define the risks. Scheme members appear to benefit from individual risk management and individually identifiable pension pots, while employers and/or pension providers seem relieved from risks and enjoy the security of fixed pension contributions. The possibility to take out a lump sum seems contrary to the collective sharing of risks in both CIDC and CDC schemes.