UK government exploring options for CDC [updated]
The UK’s Department for Work and Pensions (DWP) is not planning to introduce secondary legislation to legally accommodate collective defined contribution (CDC) plans, an official has said.
Speaking during a conference hosted by Cass Business School on Monday, Julian Barker, defined benefits strategy team leader, indicated that the DWP would explore existing legislation for ways to provide legal backing for the introduction of CDC.
Barker was responding to a presentation by Jenny Hall, head of regulatory engagement at Royal Mail. The postal service group agreed with its union in February that it would explore switching from its current defined benefit (DB) plan to a CDC arrangement.
Barker said the DWP had not yet started drafting legislation and could not provide a timeframe for doing so, or predict the outcome.
“The subject is difficult to legislate and would require sufficient input from pension funds as well as time,” he said. “However, we are working with Royal Mail to understand its concept.”
“The subject is difficult to legislate and would require sufficient input from pension funds as well as time”
Julian Barker, DWP
He indicated that parliament was also short of time to deal with the matter.
Barker told IPE that there was hardly any demand from pension funds for secondary legislation for CDC.
Royal Mail’s Hall said the group would not switch its pensions arrangements to CDC without proper legal backing. It wants to offer a CDC target pension combined with a DB-style lump sum at retirement for the fund’s 142,000 participants.
The group’s current pension plan was unaffordable, Hall said, as the employer contribution was set to increase from 17.1% to 50% this year to fund its pension promises.
As one of the advantages of CDC, Hall cited a less conservative investment strategy in the years prior to retirement with the potential of higher returns, as well as “less complexity for participants, who don’t have to make investment decisions as required in pure defined contribution [DC] plans”.
In 2014 the UK parliament passed primary legislation supporting the concept of defined ambition – also known as CDC – allowing pension plans to provide for arrangements in between the guarantees of DB and the non-guaranteed DC.
However, it later postponed indefinitely the full introduction of the concept.
During the conference, David Blake, director of the pensions institute of Cass Business School, had said there were no less than 11 separate definitions of CDC.
Edit: The DWP has told IPE that secondary legislation for CDC has not been permanently ruled out.