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UK set to confirm collective DC as future pension in DA debate

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Collective defined contribution (CDC) schemes are set to be selected as a future pension scheme option in the UK, with legislation to be put forward in the next Parliament.

Reports from national newspaper, The Sunday Telegraph, suggested the implementation of CDC will be laid out in Wednesday’s Queen’s Speech, which sets out the legislative agenda for the next Parliamentary session.

In the launch of a government consultation on DA and greater risk-sharing in November 2013, the government name-checked CDC and the Danish ATP model as two potential outcomes.

The response to the consultation has not yet been published, although it was expected earlier this year.

Pensions minister, Steve Webb, has long been a supporter of CDC, and with the legislative introduction set to be announced, CDC could be left as the sole definition of DA.

The newspaper suggested CDC legislation could be in place by 2016.

However, its implementation could be complex as the first round of auto enrolment will almost be complete by then, and, uncertainty over how, and if, it complements recent changes to DC landscape announced by the Treasury.

Aon Hewitt, the consultancy, and support of CDC in the UK, said its attraction outweighs that of other potential DA designs and defined benefit (DB), due to the lack of guarantees.

On how CDC would fit into the post-2014 Budget DC environment, partner at Aon Hewitt, Matthew Arends, said individuals would still want to generate an income in retirement, such as that provided by CDC.

“There will be a need for some form of income generating solution from at least part of members’ DC pots to replace income that previously would have been provided by an annuity.

“We can expect a proliferation of market innovation to fill this need. However, many of these new options will expose members to increasingly complex decumulation decisions.

“CDC plans have a big role to play because they are pooled vehicles and so avoid the need for members to take investment decisions,” he said.

“We envisage that many employers will take the opportunity to use CDC as a core part of retirement savings to provide an income – in addition to fully flexible DC cash savings,” he added.

The debate over CDC’s implementation has split the industry, with previous debates highlighting Aon Hewitt as strong supporters and Mercer suggesting the government should focus on reducing stringent DB requirements.

Towers Watson said CDC would require a “radical” change to pensions legislation in the UK, and employers would refrain from taking on additional risk voluntarily.

Colin Richardson, client director at independent trustee firm PTL, said CDC’s major benefit, even post-Budget, is still its longevity pooling.

“There are other advantages to CDC of course in relation to potential greater predictability of future pensions and greater pension amounts,” he added.

“However, great care is needed in comparing the potential pension amounts as most CDC scheme studies were performed before the March 2014 budget and are thus based on outdated comparisons with constrained DC schemes.”

CDC was first touted as an option for UK employers in 2009.

A study into its feasibility, by the then Labour Government, said the legislative changes required were too complex and there was a lack of interest from employers, resigning CDC to the legislative scrap heap.

Current Labour MP Rachel Reeves, and shadow work and pensions secretary, said sharing risk and rewards across generations, such as in CDC, appeals to the principles of the country.

“We need to be clear that such schemes do expose people to a different set of risks and this makes it all the more important that they are subject to robust governance mechanisms,” she said in a speech last week.

“Opening the way to CDC schemes makes it all the more important the government takes up our call to impose a legal requirement on all pension scheme providers to prioritise the interests of savers above those of shareholders – policed, where possible, by independent trustees.”

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