The extension of collective defined contribution (CDC) pension schemes will be a positive development as long as there are sufficient protections to ensure the new types of CDC schemes have robust designs and high-quality communications, the Institute and Faculty of Actuaries (IFoA) stated, as the Department of Work and Pensions (DWP) consultation on extending opportunities for CDC pension schemes came to a close yesterday.
The IFoA said in its response that CDC schemes have a lot of merit, providing a cost-effective retirement income for life and avoiding the need for individuals to make complex pensions management decisions. However, access to unbiased information for those considering joining a CDC scheme, whether employer or employee, will be critical to its success.
Simon Eagle, chair of the IFoA’s CDC Pension Working Party, said: “CDC schemes are a new option whereby pensions are managed by trustees, risks around investment and life expectancy are pooled between members, and costs are fixed for both employers and members. The IFoA supports the continued development of multi-employer arrangements for employers who want to offer ‘whole of life’ CDC without having to set up a scheme themselves. Further, we believe there is high demand for ‘decumulation CDC’; this would allow DC savers in standard DC schemes to turn their pot into an income for life which would not be guaranteed like an annuity but which would be expected to be much higher.”
Eagle noted that the new CDC schemes would need to be designed robustly so that pension levels change in a “fair and justifiable way” when it comes to changes in markets and member lifespans.
“In addition to providing unbiased information at the outset for those considering CDC schemes, there must be ongoing high-quality communication to create trust in the system and help members understand the risks and advantages of the scheme they are in,” he added.
Claire Altman, managing director of individual retirement at Standard Life, said: “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. The end of the era of low interest rates has made annuities a more attractive option for those looking to secure a guaranteed income and this is a welcome development, since over three quarters (78%) of people tell us they want income certainty in retirement.”
Altman said that there is a higher interest for a more blended approach that allows people to achieve the best of an annuity and drawdown. “We expect to see significant innovation and product development over the next couple of years, and welcome CDC being part of the pensions saving toolkit.”
Consultancy LCP supports the scheme-design proposals outlined in the CDC consultation, which align well with its own wider industry discussions over the past year.
However, LCP’s partner Steven Taylor believes there are potentially some additional complexities for “commercial” or “decumulation only” CDC schemes, which may require further regulatory consideration.
“In time, we agree that more commercially focused schemes should be developed, with ‘decumulation only’ arrangements a natural home for many millions of today’s savers who have only known DC. We also believe there is a strong argument for the set up or appointment in due course of a default CDC scheme, perhaps similar to NEST for the DC world, which could also be available for decumulation purposes,” Taylor said.
Value for money consultation
On DWP’s consultation Value for Money: A framework on metrics, standards, and disclosures – which also closed yesterday – the UK pensions industry has voiced its opinion that the overall approach to assessing value requires reform, with special attention to member outcomes.
Callum Stewart, head of DC investment at Hymans Robertson, said: “We feel the proposals could go further in terms of addressing value from strong governance, and the quality of retirement support which will be a key driver of outcomes. Whilst we welcome the emphasis on net rather than gross investment performance as a metric, we would caution encouraging members or decision makers to make choices on the basis of this information.”
He added that “continuing to encourage an emphasis on value and outcomes over cost will be welcome to meet the overriding ambition of improving retirement outcomes for savers across the UK”.
Stewart is expecting a final response following the consultation to result in “significant changes to the current requirements and a focus on outcomes and value, not cost”.
Tim Box, senior consultant in LCP’s research team, said: “The framework must not simply be another layer of bureaucracy added to the already substantial compliance burden for pension schemes and we strongly believe that, with a bit of modification to the framework, this can replace the need for chair’s statements which have become a millstone around the neck of DC pension schemes.”
The framework must not simply be another layer of bureaucracy added to the already substantial compliance burden for pension schemes”
Tim Box, senior consultant at LCP
Box noted that there are significant concerns about the DWP’s proposals to compare investment performance net of member-borne costs and charges and all costs paid by an employer to a scheme or pension provider.
“We understand the principle behind this of ensuring comparison on a like-for-like basis by pension professionals but nevertheless we still believe this could be confusing for scheme members and potentially lead to them making poor decisions, such as opting out of an employer-sponsored scheme where they receive employer contributions and subsidies and instead joining personal pension with notionally better investment returns but which has higher charges which negate this apparently better return,” he explained.
Richard Birkin, head of DC pensions at Isio, added that the current proposal is unlikely to go far enough, adding that a much firmer stance is required to manage the challenges that can arise when trustees assess value.
“Trustees with the ability to cherry-pick schemes will likely make own-trust to own-trust comparisons. This is not necessarily indicative of value for money across the industry, and actually, the very best schemes should be used as a ‘gold standard’ comparison,” he said.
“To enable cross-consultancy comparison, we believe greater focus should be placed on the construction of industry-wide benchmarks to enable a more scientific approach to comparing value. Until the regulator is able to centrally assess value, we believe value-for-money assessments will continue to lead to inconsistent outcomes across the industry,” Birking said.