The UK’s Department for Work and Pensions (DWP) is working on extending opportunities for collective defined contribution (CDC) pension schemes, as The Pensions Regulator (TPR) approves the Royal Mail Collective Pension Plan as the first registered CDC scheme in the UK.
According to a statement, the authorisation is a milestone for TPR and shows how the regulator is pursuing its strategy to “embrace innovation to help meet pension savers’ needs”.
Minister for pensions Laura Trott said: “TPR authorising the first CDC scheme is a landmark moment, and this is just the beginning. We have seen the positive effect of these schemes in other countries and our plans to extend our CDC framework will enable more pensioner savers to achieve the retirements they want.”
The Royal Mail planned to launch the UK’s first occupational CDC scheme in 2022, as the Pensions Act 2021 became law at the beginning of 2021.
The DWP consulted on extending opportunities for CDC schemes at the beginning of this year and is soon to publish its response, which will clarify how the CDC market can best provide a wider reach to other CDC funds to be set up such as for groups of employers who aren’t legally connected.
TPR is working closely with the DWP on this, it added.
Currently, CDC schemes can be set up by single employers, for that employer only, or for employers in the same group of companies.
“The industry is thinking carefully about how we can deliver better outcomes for savers and CDCs could prove to be a useful part of the toolkit. For those employers who still offer defined benefit schemes, CDCs could provide a half-way house between defined benefit and defined contribution arrangements, particularly as it reduces costs and risk for the employer,” said Claire Altman, managing director of individual retirement at Standard Life.
Madalena Cain, associate partner at Aon, added: “In efforts that stretch back over 10 years, Aon has done considerable work in preparing the way for CDC and in supporting employers and providers in developing their CDC vision. It’s clear to us that more CDC schemes will be established in future.”
The Pension Schemes Act 2021 introduced an authorisation and supervision regime for CDC schemes which requires them to meet stringent criteria including that those who run the scheme meet fitness and propriety requirements, have the right systems and processes in place, can show the scheme is financially sustainable and have robust member communications.
Other solutions
It’s important, however, to ensure CDC schemes will be sustainable and that proper protections are in place if things don’t go as expected, Altman stated.
“It’s important to think about CDC in the context of the wider range of options and what these can achieve. There is a lot happening in the retirement space, and while it is great that CDC will be an option, we shouldn’t forget that other solutions are available to savers,” she said, adding particularly at a time when low interest rates have made annuities a more attractive option for those looking to secure a guaranteed income.
Aon’s Cain said: “We strongly support the DWP’s plans to legislate for wider forms of CDC schemes to exist, in particular to introduce legislation covering both whole-life multi-employer CDC schemes and decumulation-only CDC solutions. This will bring CDC to the masses, and we urge the government to commit to ensuring the regulations are in place for these wider forms of CDC by the end of 2024.”
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