Regulations allowing for unconnected multi-employer collective defined contribution (CDC) pension funds will be laid before UK parliament tomorrow.
The move builds on the progress made by the UK’s first CDC scheme, the Royal Mail Collective Pension Plan, which has over 100,000 members and reflects growing demand for pensions that deliver a lifelong income.
The new regulations will allow the expansion of CDC to more employers and address greater demand from employees to receive a more secure income, with research showing that almost three-quarters of people with DC pension funds want a guaranteed income from their pension, despite 50% of pots currently being taken out as a lump sum.
The UK government expects that, as well as putting money in workers’ pockets, pooling will enable pension funds to make bigger investments in assets such as UK businesses and infrastructure projects. This will boost the UK economy, as seen in countries such as Canada and Denmark, which already have a CDC system in place, as well as support the government’s Plan for Change to drive economic growth and improve retirement for millions of savers.
Ahead of the regulations being laid in parliament tomorrow, minister for pensions Torsten Bell will deliver a speech to hundreds of key employers across the UK later today, setting out the benefits of CDC schemes and the next steps to implementing them.
The UK is also launching a consultation on ‘Retirement CDC’, which would allow people who have saved into a DC pension fund to transfer their pension pot into a CDC scheme at retirement.
This builds on reform already underway to create better pensions for tomorrow’s generation. This includes the Pension Schemes Bill, which could boost a worker’s pension by £29,000, and the revival of the Pensions Commission to ensure tomorrow’s pensioners are not poorer than today’s.
Bell said: “Too often, people approaching retirement are left navigating complex choices and shoulder risks they shouldn’t have to face alone.
“Collective pensions offer a better deal, one where risks are shared, returns are smoothed and retirement incomes are stronger and paid for life.”
He added: “By expanding CDC to more employers and consulting on retirement CDC, we are helping build a fairer pensions system that gives people confidence their hard-earned savings will last and they can enjoy their retirement.”
The move was welcomed by the director of the CDC Forum, David Pitt-Watson. He said: “This is a major step forward for pension provision in Britain. If employers who sponsor pensions follow through, it will mean private sector workers, as well as those in the public sector, have an effective pension which will last them until the day they die.”
“Collective pensions offer a better deal, one where risks are shared, returns are smoothed and retirement incomes are stronger and paid for life.”
Torsten Bell, UK pensions minister
Zoe Alexander, executive director of policy and advocacy at Pensions UK, highlighted that while the multi-employer CDC schemes have the potential to boost retirement savings by sharing risks between savers, success will depend on striking the right balance between strong protections for members, simplicity and fairness of the scheme design.
“We agree with the government that innovation in CDC carries huge promise for savers and are pleased that this government is supporting the development of both multi-employer and at-retirement CDCs,” she said.
Andy O’Regan, chief client strategy officer at TPT Retirement Solutions, said the publication of the regulations marks a “major leap forward” for the UK pensions industry.
“For the first time, employers of all sizes will be able to access the benefits of collective DC provision, paving the way for better outcomes for members and greater scale in this new model. The new rules will allow more workers to receive incomes for life in retirement, avoiding the need to make difficult decisions, while employers will maintain the cost certainty they have with DC provision,” he noted.
TPT has announced its intention to launch a multi-employer CDC scheme earlier this year.
“Unlike the whole-life model, CDC in decumulation does not pool investment risk in accumulation, but it does take advantage of longevity pooling in a similar way, to provide a lifelong income in retirement. As such, this model could be of particular interest to DC schemes, which will be required to offer members a ‘guided retirement default’ in future years. We will continue to engage with the government to help shape the regime for this model,” O’Regan explained.
Lynne Rawcliffe, pensions trustee director at Law Debenture, said the changes are a sign of “real progress” as savers are truly placed at the heart of a member-first approach, and could see material benefits in comparison to typical DC schemes.
She said: “This will also be good news for employers, who can use CDCs without being exposed to the financial risk associated with traditional defined benefit pensions and maintain a fixed contribution structure akin to a DC arrangement.”
But Rawcliffe urged that it is going to require a “collaborative approach” across the pensions landscape. “It’s vital that trustees are involved early in the process, and play a key role in shaping member expectations and providing crystal-clear communication on CDC benefits.”
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