UK pensions consultants have called the government’s commitment to launch a new national collective pension scheme for adult social care workers an “important vote of confidence” in collective defined contribution (CDC) pensions.
Yvette Cooper, health and social care secretary, announced the measures in her keynote address at the Labour Party Conference last week.
Cooper said the new collective pension scheme would be the first of its kind nationally for workers in the care sector, placing pensions alongside pay and employment conditions as part of the government’s wider workforce reform programme.
Full details have not yet been announced, including who will be eligible, how much employees and employers will contribute and when the new pension scheme will begin.
Care sector ‘particularly well suited’ to CDC opportunities
However, the industry has welcomed the announcement, with Lauren Branney, head of CDC at Hymans Robertson, saying it is “encouraging” that the government is recognising the opportunity that CDC pensions can present.
Branney said that the care sector is “particularly well suited” to a sector-wide CDC scheme, as workers frequently move between employers, and many hold multiple part-time roles.
She continued: “Yvette Cooper’s comments are an encouraging signal that policymakers recognise the role CDC could play in supporting a vital UK workforce while helping more savers achieve better retirements. CDC has the potential to address some of the biggest retirement income challenges facing lower- and middle-income earners. They often face a savings affordability challenge during their working lives and a retirement adequacy challenge in retirement.
“By pooling longevity risk and investing collectively, CDC can provide higher expected retirement incomes than traditional defined contribution arrangements. It can provide an income for life while also removing much of the complexity individuals face when making decisions about retirement income. There will be trade-offs that come with CDC, but overall it offers an excellent opportunity for the sector.”
Chintan Gandhi, partner & head of collective DC at Aon, agreed that the social care sector is “particularly well suited to a collective approach”, with a scheme having the potential to provide greater continuity, improve retirement outcomes and help strengthen the overall employment offer within the sector.
‘Important vote of confidence’
But more broadly, Gandhi said the announcement represents an “important vote of confidence” in CDC pensions and in the role they can play within the UK’s retirement system.
He said: “For many years, policymakers, employers and the pensions industry have been exploring how to bridge the gap between traditional defined benefit pensions and individual defined contribution arrangements. CDC offers one possible answer: fixed and predictable costs for employers and employees, while aiming to provide employees and members with an income for life that is expected to keep pace with the cost of living and deliver better outcomes than individuals bearing investment and longevity risks on their own.”
Gandhi said the growing recognition that retirement solutions need to reflect how people actually work and save today is “particularly encouraging”.
He said the announcement is important not only in its own right but also because it “demonstrates that collective solutions are moving from theory into practice. If implemented successfully, it could help pave the way for wider adoption of CDC across other sectors of the economy.
“This should therefore be viewed as more than ‘just’ a pensions announcement,” Gandhi added. “It is a sign that collective pensions are becoming an increasingly credible part of the UK’s retirement landscape.”
Close collaboration between government and industry critical
Ruari Grant, head of policy and external affairs at TPT Retirement Solutions, pointed out that designing a scheme that works effectively across a sector characterised by a highly fragmented employer base, “will not be straightforward”, but said the industry “mustn’t shy away from this challenge”. He said a close collaboration between government and industry will be “particularly important” to make it happen.
Simon Eagle, GB head of CDC at WTW, added that industry-wide multi-employer schemes have “worked well on a DB basis for some other sectors” and expects the social care CDC scheme will be similar to this “in some ways except will provide variable pensions rather than a level guaranteed by the employers”.
He said: “There are around 19,000 employers in the social care sector, many of which are very small, and so the eventual provider of the scheme will need excellent administrative technology to cater for the employer onboarding and contribution payroll requirements.”
Eagle expects that social care scheme could become “a blueprint” for industry-wide ‘whole of life’ CDC schemes, “for some other sectors to also adopt in time”.
