The proposals would create a scheme that is something of a hybrid between DC and DB.  The key features are:

 

Both the employer and employee would contribute to a collective fund from which an income is drawn. Investment and longevity risk are pooled across the membership and as the fund is administered and managed on a collective basis, there is no need for members to make choices about the investment of funds or the ways of converting that fund into an income stream in retirement. At present each member has an individual pension “pot” rather than a share of a collective “pot”. Collectivisation would allow investment in longer duration assets and would eliminate some of the drivers for wanting daily liquidity. At this stage, the schemes are assumed to be collective for a single business, but real investment scale and reduction of member volatility would be achieved by collectivisation across an industry. Individuals are much more likely to move employer than they are to move industry completely.

 

CDC schemes would offer a “target income” at retirement. If the scheme is under (or over) funded then the level of member benefits can be adjusted to ensure the assets of the collective fund are equal to the liabilities relating to the target incomes. This gives members less certainty than under a DB scheme, but a clearer idea of anticipated benefits than under a DC scheme. Individuals would stay in the scheme through retirement rather than drawing down and investing in an annuity. Again, this should have an impact on the investment behaviour of the scheme.

 

So what does this mean from investment in real estate and other long-term, illiquid assets? It depends…. It could fizzle out to nothing, but if done properly it could be huge and create an investment pool with more appetite for long-term, illiquid assets than even current defined benefit schemes, with some of it allocated to higher risk, higher return strategies.