The UK government will introduce legislation in a future Finance Bill to support defined contribution (DC) pension consolidation, guided retirement and retirement-only collective defined contribution (RCDC) schemes, following announcements in the autumn Budget.
The legislation will amend the conditions under which individuals can retain protections relating to their pension age or tax-free lump sum when transferring pension rights between pension schemes.
It will also allow members who begin receiving a pension from an RCDC scheme to convert it into a drawdown pension within a specified period, if the scheme offers that option.
Further changes will ensure benefit payment rules operate as intended for RCDC schemes and allow transfers from drawdown funds into RCDC arrangements, the government said.
Simon Eagle, head of CDC and risk sharing at WTW, said: “This is good news. DC pension schemes will soon have to offer default solutions for turning pension pots into retirement incomes. One of the options for that, retirement CDC, offers a way to pool longevity risk so that members receive an income for as long as they live, without locking them into the low-return investments that underpin annuities.”
Eagle said a member ‘cooling-off period’ would help address potential trustee concerns about making RCDC a default retirement income solution, giving members a short-term option to change their minds if they no longer wanted an income for life.
He said: “This is similar to successful cooling-off periods provided by some similar international schemes.”
Sam Burden, client director and head of Zedra’s governance advisory arrangement, said the legislation would help make the introduction of a guided retirement framework and RCDC a “success”.
He said: “These schemes offer the potential for a higher lifetime retirement income for those with DC pensions than current retirement choices. Important protections have been added: to keep historic entitlements above current limits and to be able to transfer out without adverse tax consequences. Both these measures will make it easier for trustees to evaluate if R-CDC is an appropriate default guided retirement path for their members.”
Helyne Slade, director and head of DC investment at Isio, said it was “encouraging to see continued attention on improving the options available to members as they approach and enter retirement”.
She said: “The proposed changes to member protections and transfers between retirement CDC and drawdown arrangements are important practical considerations. However, the key challenge will be ensuring that the different reforms work together coherently, without introducing unnecessary complexity for schemes, providers, trustees or members.”
Slade said the success of DC reform should be measured by whether greater scale, better investment opportunities and improved retirement solutions translated into better outcomes for members.
“The priority now must be ensuring that the different elements of the reform agenda work together to deliver meaningful improvements for savers,” she added.
