Collective Defined Contribution (CDC) schemes should be extended to other types of pension scheme, such as multi-employer schemes and master trusts, said Guy Opperman, the UK’s Minister for Pensions yesterday at the Royal Society of Arts (RSA) CDC Forum.
At the forum, the Minister highlighted how the regulations will come into force on 1 August, and discussed the ways in which the next phase of CDC schemes might be taken forward with a consultation planned later this year.
“I am keen to move quickly, but we must get this right if it is to work. That is why I am calling on all those who are seeking to deliver the full benefits of CDC to work with us to help make this a reality,” he said.
CDCs work by employers and employees contributing to a collective fund from which individual retirement incomes will be drawn. These collective funds can be invested in what are called ‘higher return seeking assets’ over a longer period than traditional defined contribution (DC) schemes, benefiting the growth of the fund and its members.
Currently, regulations will provide for single and connected employer CDC schemes. Some parties have already expressed an interest in pursuing multi-employer CDC schemes as an offer for their members, as well as proposals for master trust and CDC models that offer ‘decumulation only’ (when pension savings are converted to retirement income).
Later this year, the Department for Work and Pensions (DWP) aims to consult on a package of prospective design principles and approaches to accommodate new types of CDC schemes. This will bring the potential benefits to more savers in the UK in an appropriate way, while also capitalising on the enthusiasm industry have shown for innovation in this area.
Simon Eagle, CDC working party chair of the Institute and Faculty of Actuaries (IFoA) and who has also participated in yesterday’s forum, said: “Good pension outcomes vary by individual in the UK depending on income needs and their desire to manage their own retirement savings. The IFoA’s view is that better options could be made available for some groups.”
He noted that the institute was “open-minded about the possibilities” and that it had been investigating CDC pensions as a potential solution.
“With the IFoA’s support, fundamental steps have already been taken to enable CDC in the UK through the Pension Schemes Act 2021 and associated regulations. What is clear now, is that there are further questions to answer in terms of broadening scheme design and facilitating adoption for willing employers and employees in the UK,” Eagle said.
However, the current scheme design available is restrictive in terms of age-related contributions and could be seen as an initial barrier for some.
Steven Taylor, partner at LCP, has called for age-related contributions to be allowed in CDC schemes to make it more appealing to a wider range of schemes.
“It’s been a concern that the scheme designs available are currently very restrictive and linked heavily to the Royal Mail design. This means regulations may not currently be flexible enough for schemes that are run in a different way,” Taylor explained.
“This is the first time that the pensions minister has explicitly asked for help to make sure that the structure is user friendly to a more schemes,” he added.
“Allowing schemes to make age related contributions would be a game changer and will make it fairer for younger people. We believe there are ways that this can be achieved without introducing new risks to schemes,” he said.