Member communications will be key to the success of collective defined contribution (CDC) pension schemes, according to industry respondents to the government’s consultation, which closes this week.
The government introduced draft CDC legislation to parliament in October and asked for feedback on the structure and regulatory framework for retirement-only CDC arrangements.
Respondents have emphasised the need for the new retirement option to be clearly communicated to members and closely aligned with the introduction of ‘guided retirement’ rules, set to come into force once the Pension Schemes Bill is enacted.
“Clear, consistent, and non-technical communications are essential, both at the point of entry and throughout the member’s lifecycle, including prior to retirement.”
Vassos Vassou, APPT
Vassos Vassou, vice chair of the Association of Professional Pension Trustees (APPT), said members of CDC schemes needed to “understand the nature of the product”, in particular what collective risk-sharing is and how it works, as well as the fact that there are no guarantees and benefits may be adjusted downwards as well as upwards.
“Clear, consistent, and non-technical communications are essential, both at the point of entry and throughout the member’s lifecycle, including prior to retirement,” he continued.
“This is particularly important if retirement CDC is used as the default decumulation option in a scheme, as it will impact on the investment strategy during accumulation, which may not be suitable if the member does not wish to use the CDC solution.”
Steven Taylor, head of CDC at LCP, added: “CDC at retirement could be a game-changer, but only if people understand it. Engagement with pensions outside the industry is low, and that makes introducing new options a real challenge. If we want CDC to succeed, we need a clear education strategy, so savers know what’s on offer and why it matters.”
Joined-up thinking essential
Respondents also called for CDC rules and implementation to be aligned with other developments – in particular, guided retirement. Through the Pension Schemes Bill, traditional defined contribution pension schemes will be required to have a default option for the members to take an income in retirement.
Under current timetables, guided retirement requirements will be in force before retirement-only CDC schemes are ready, but Stewart Hastie, chair of the Association of Consulting Actuaries (ACA), said this needed to be addressed.
“It is important that retirement CDC arrangements are available for trustees to select as their default, before the guided retirement requirements are brought into force under the Pension Schemes Bill,” Hastie said. “Otherwise, there is a risk that trustees will select their default from the more limited options available. This in turn could lead to sub-optimal outcomes for savers and members, and could have significant implications for the likely size of the retirement CDC market.”
LCP echoed this issue in its response, calling for the government to “provide early guidance on how schemes should factor in CDC and commit to ongoing market reviews to keep strategies relevant”.
The APPT’s response said it was “vital” that trustees receive “clear articulation” from regulators about how CDC fits with their duties relating to post-retirement options, including “signposting, scheme-provided pathways, and behavioural nudges”.
The ACA’s Hastie also called for retirement-only CDC rules to be “closely aligned” with proposed rules for multi-employer CDC schemes, including risk sharing and indexation.
“In particular, the process for expanding an unconnected multiple-employer CDC scheme to also offer retirement CDC benefits should not include any unnecessary hurdles,” he said.
Paul Waters, head of DC markets at Hymans Robertson, said: “Retirement CDC is a natural fit with the proposed guided retirement duty for pension schemes. Providing a solid default retirement solution for DC members will help people for whom financial advice is not practical. It will also lead to higher volumes into retirement products, helping those products to achieve scale and deliver best value for members.”
New responsibilities for CDC trustees
With CDC arrangements designed to provide an income throughout retirement but without the guarantees of a traditional defined benefit pension scheme, some respondents highlighted that trustees would need additional support and guidance from regulators and policymakers.
The APPT’s Vassou said: “Trustees will need certainty about the minimum disclosure standards, the required risk warnings, and the expected format of member literature. These requirements should be set out unambiguously and aligned, where possible, with existing CDC and decumulation-related disclosure regimes to avoid duplication and inconsistency.”
“This is a new product, and it should not be entirely the responsibility of trustees, employers, and the advisory community to explain the concept to savers.”
Donna Matteuci, LCP
The association’s response outlined several areas in which trustees would need “a definitive and comprehensive set of disclosure obligations”, outlining key times to contact members and what information should be shared, as well as what needed to be shared with regulators.
LCP agreed that trustees’ roles in CDC schemes would evolve to focus more on the at-retirement process and supporting members throughout retirement, which meant “clear guidance” was needed.
Donna Matteuci, senior consultant in LCP’s pensions research team, added: “This is a new product, and it should not be entirely the responsibility of trustees, employers, and the advisory community to explain the concept to savers. Similarly, trustees and employers themselves are likely to also need government guidance to understand and make use of CDC schemes.”
