The UK’s Department for Work and Pensions has launched a consultation on collective defined contribution (CDC) provision – Extending Opportunities for Collective Defined Contribution Pension Schemes – aiming to broaden CDC provision beyond single or connected employer schemes to accommodate multi-employer schemes.
The consultation, which will run until 27 March 2023, is seeking responses from pension scheme trustees and managers, particularly those from DC master trust schemes, pension scheme service providers, employers that sponsor an occupational pension scheme, and those seeking to establish a CDC scheme.
The UK has seen the appetite for extending CDC provision to unconnected multi-employer schemes and master trusts increase. This was underscored by the large number of respondents to DWP’s recent call for evidence – Helping savers understand their pension choices – which supported the role CDC can play in helping provide pension scheme members with more options for turning their pension pots into a long-term retirement income.
Laura Trott MP, minister for pensions in the UK, said: ”By extending our secure and dependable CDC framework, more members will be able to benefit from the opportunities of sharing risk. This means their pension savings work harder for them and provide, on average, a better outcome for their retirement than might otherwise be available.”
She noted that this consultation “sets out our proposals for how our CDC framework could be adapted to allow more employers of all sizes to offer CDC schemes, and to allow more flexibility in design”.
“It is an opportunity to help shape the next stage in one of the most significant developments in UK pensions and I encourage all interested parties to respond and play their part in helping improve outcomes for tomorrow’s pensioners,” Trott said.
’Half-way house’ between DB and DC
Kathryn Fleming, partner at Hymans Robertson, believes this consultation is another step along the journey towards equipping pension providers with the tools to allow them to design decumulation solutions that can meet the needs of future DC savers.
“CDC in decumulation might not be the right solution for all DC savers, recognising that retirement needs are very personal and multi-layered.” Fleming said, adding: “But it will offer the exciting prospect of a solution that bridges the gap between the complete flexibility and risk of drawdown and the certainty but irreversible option that is offered by annuities. It is right that the conversation takes place now, as the scale required to deliver these solutions is fast approaching.”
Claire Altman, managing director for individual retirement at Standard Life, said: “CDC has attractive features for both employees and employers, providing a half-way house between defined contribution and defined benefit arrangements. Their structure could provide employees with greater income certainty in retirement when compared to DC – modelling suggests a 30% uplift on returns for the same level of risk, without employers taking on the significant costs associated with DB schemes.”
If CDC takes off, Altman noted, it is likely to be through commercial multi-employer schemes, since the costs and risks to individual employers of introducing their own scheme may be prohibitive for all but the largest companies.
The consultation provides an opportunity to explore the feasibility of whole-life multi-employer schemes based on current frameworks and the challenges that come with this, she continued. “It will also, importantly, explore the role of CDC in decumulation and whether there is significant appetite for CDC decumulation-only products.”
Regulations should be in place
Chintan Gandhi, partner and head of CDC at Aon believes this to be the next step in the evolution of UK CDC schemes, with the DWP on the path to legislating for multi-employer CDC schemes, and testing the water on decumulation-only CDC.
However, he urges the government to commit to ensuring the regulations are in place for both of these forms of CDC schemes to exist by the end of 2024.
“A key development is DWP allowing for CDC benefit designs where there is a uniform contribution rate across all employees (and so a varying accrual rate by age), matching how the vast majority of DC schemes operate,” Gandhi said.
“We agree with DWP that CDC pensions should at outset target a level of inflation-proofing. This is vital to balance savers’ desire for their pension income to broadly keep pace with the cost of living, while reducing the likelihood of cuts to members’ target pensions. However, there is a tightrope to walk because the DWP focuses on additional member protections – which is laudable – but risks making multi-employer CDC schemes too onerous to set up,” he continued.