Collective defined contribution schemes will be designed to minimise intergenerational unfairness, according to the Department for Work and Pensions, as it announced plans to legislate for the benefit structure in late 2019.
Pensions and financial inclusion minister Guy Opperman is to announce the government’s intentions in a written statement to parliament later on Tuesday.
A consultation launched at the same time outlines the government’s thinking on CDC, including a regulatory system where the impact of market shocks is shared out immediately between all active, deferred and pensioner members.
If you have a buffer it’s incredibly difficult to make sure you are fair between the generations
Hugh Nolan, Spence and Partners
First attempted (but never fully enacted) in legislation by the coalition government, CDC scheme design has largely been driven by Royal Mail and the Communication Workers Union, who agreed to collaborate on a “wage in retirement” as part of a dispute resolution process.
Royal Mail is yet to publish its design for a scheme. In its consultation, the DWP has admitted that few other employers are currently interested in creating CDC schemes.
Royal Mail gets legislative demands met
Speaking to Royal Mail workers in London on Monday afternoon, Opperman was keen to stress that despite the paucity of employer demand for similar arrangements, legislation was worth it to secure Royal Mail’s future.
“One out of every 190 people who work in the UK work for Royal Mail,” he said. “There is a huge number of people who this affects and it matters so much that we ensure that we give you a proper future.”
Legislation will be drafted after the consultation closes in January, and brought before parliament in December 2019, Opperman said. The DWP will not seek to use the legislation laid for defined ambition in 2015, instead preferring to create a fresh act and subsequent regulation.
Early indications are that the government, which has been in contact with shadow pensions minister Jack Dromey on the development of CDC, has support across the political spectrum.
CWU deputy general secretary Terry Pullinger said wages in retirement are needed “if ordinary working people are going to have dignity in retirement”, while Tory peer and executive chair of the Resolution Foundation David Willetts said CDC reduces the risk of exposure to “the ups and downs of investments” and “the uncertainty of how long each of us will live”.
Regulation must protect savers
However, support from the pensions industry appears to be conditional on the surrounding regulatory environment being fit for purpose.
Nigel Peaple, director of policy and research at the Pensions and Lifetime Savings Association, said CDC could be a good option for employers yet to move to DC from defined benefit, but added: “Fairness to savers in the design of these schemes is paramount and we therefore believe that it is vital they have strong governance processes in place and that it will also be made clear to savers how they work.”
Nathan Long, senior analyst at Hargreaves Lansdown, agreed: “Communicating these benefits will have to be done incredibly carefully so that people realise their pensions are not guaranteed, especially seeing as some investors are still nursing hangovers from With Profits pensions, which share many similarities with CDC pensions.”
The DWP’s consultation has taken steps to address this. Opperman stressed the importance of members understanding that CDC benefits are not guaranteed. The government’s consultation makes clear that investment underperformance will be countered by an immediate reduction in benefit promises to all members, rather than by a financial buffer.
No Dutch buffers
Funding surpluses, as employed by Dutch CDC schemes, reduce the likelihood of cutting pensions in payment, but rebuilding buffers after the financial crisis led to accusations of intergenerational unfairness.
“With the financial crisis they had to service those buffers and the impact of that affected younger people more than older people,” a DWP spokesperson explained.
The spokesperson said market shocks could often be absorbed by tweaking inflation protection in one year for all members, rather than cutting benefits.
“The immediate impact of changes are in almost all circumstances going to be relatively small,” they said. The government favours a best estimate actuarial methodology for CDC.
Consultation takes sensible approach
Hugh Nolan, director of consultancy Spence and Partners, said he was heartened by the government’s approach in the consultation.
“If you have a buffer it’s incredibly difficult to make sure you are fair between the generations,” he said.
He also welcomed the decision to create new legislation defining CDC as a type of money purchase benefit, removing the possibility that employers ever have to stump up cash to fill deficits.
“If you shoehorned it into existing regulations employers would be terrified about sudden retrospective changes.”
Nolan expected few employers to follow suit in the near future, but said CDC could feasibly fill weaknesses in DC decumulation product ranges, and may see take-up from paternalistic employers if Royal Mail’s scheme is successful.
