The Government has today published a long-awaited consultation setting out details of how so-called ‘Collective Defined Contribution’, or CDC, pensions will operate in the UK.
The proposals, abandoned by the previous administration, were resurrected after Royal Mail said it was keen to offer collective pensions to its membership.
Key points
• Government to legislate for CDC schemes in the UK ‘as soon as Parliamentary time allows’
• Schemes will target a level of benefits in retirement but will not provide guarantees
• DWP says any investment outperformance or underperformance should be shared equitably among all members – including those who are already retired
• CDC schemes will be subject to a similar charge cap as automatic enrolment schemes
• Ensuring members understand their pensions could be reduced at any time arguably the biggest challenge facing CDC
Tom Selby, senior analyst at AJ Bell, comments:
“It’s clear from the DWP’s preference not to allow so-called ‘capital buffers’– where funds are built up in reserve to make payouts more predictable - and the proposed removal of any trustee discretion in adjusting benefit levels that concerns about intergenerational fairness in CDC are front-and-centre of ministerial minds.
“And by suggesting any outperformance or underperformance should be reflected in the benefits paid to all members – including those already receiving their pensions - the DWP leaves us in little doubt it will not allow schemes to be skewed in favour of one cohort of members over another.
“This fairness will, however, potentially make outcomes in CDC less predictable and raises the spectre of pension cuts should investments consistently underperform over a long period of time.
“The DWP itself notes any reductions in benefits will not be well received, and so clear communication of this – not just upfront but on an ongoing basis – will be absolutely essential.
“Simply referring disgruntled members to a complex set of scheme rules they signed up to blindly years ago won’t be good enough. Getting these communications right will arguably be the biggest challenger for employers who choose to go down the CDC route.
“Given the sheer size of Royal Mail as an employer, its demand for CDC was always likely to catch the attention of the Government and crystallise thinking around how such schemes will operate on a practical level. It remains to be seen whether other employers will share their enthusiasm.”
