Note on how to make employer risk under CDB as low as it is under UUK’s IDC proposal

Here I explain how it is possible to devise a CDB pension with an unconditional baseline promise so low that the risk to employers is as low as it is under their current IDC proposal:

CDB is more risky to employers than IDC in the following respect: the former involves some positive level of employer promise to deliver benefits in retirement, whereas the latter involves no such promise.

This needs, however, to be balanced against the following respect in which CDB is less risky to employers than IDC. Under UUK’s proposal, contributions for future pensions accrual would go entirely into various members’ IDC pension pots rather than mainly into the DB pension fund. As a result, the DB scheme would immediately become cash flow negative and USS would need to start selling assets to meet its pensions obligations, thereby exposing the scheme to disinvestment risk. This would increase the chances that employers would be called on to increase their deficit recovery contributions on account of future shortfalls in the funding of past accrual of DB pension promises. If, however, the DB scheme remains open (on a CDB basis) to future accrual at current rates on salaries up to £55k, then the scheme would remain cashflow positive in a manner that protects against disinvestment risk.

There exists a low level of unconditional baseline CDB promise going forward whose risk to employers is equivalent to the disinvestment risk to them of a cashflow negative DB scheme.

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