The government has published its draft rulebook for retirement-only collective defined contribution (CDC) pension schemes, aligning the regime with its guided retirement consultation.
Torsten Bell, the pensions minister, said in his foreword to the consultation that retirement CDC – which the government is calling “retirement collective pension schemes” – was an important expansion of the existing nascent CDC regime.
The minister said CDC schemes “have the potential to combine many of the features that pension savers value: a regular income, protection against longevity risk, the prospect of maintaining living standards over time and freedom from the burden of managing investments throughout retirement”.
“By broadening collective pension provision and creating a framework that supports innovation in retirement income design, we can help more people benefit from a pension that provides security, simplicity and support throughout later life.”
Torsten Bell, Minister for Pensions
He added: “The 2010s saw a transformation of workplace pension saving via automatic enrolment. We now have an opportunity to ensure that the retirement phase evolves as well.
“By broadening collective pension provision and creating a framework that supports innovation in retirement income design, we can help more people benefit from a pension that provides security, simplicity and support throughout later life.”
The retirement CDC rules were aligned with the guided retirement consultation – also launched this week – following industry feedback on the government’s “roadmap” for reforms.
Solving a major retirement problem
Lauren Branney, head of CDC at Hymans Robertson, described the retirement CDC rulebook as “a major moment for workplace DC pension savers”.
“While there are trade-offs in relation to flexibility and leaving a legacy, the chance to deliver a higher income in retirement is an opportunity that will work well for many, especially with the retirement income adequacy challenge we see today for DC savers,” Branney said.
“Coupled with guided retirement, the industry now has the means to harness the power of scale in delivering a default savings solution for DC members all through retirement…
“By empowering trustees and pension providers to deliver an income from DC as a default, it removes the difficult decision-making burden from savers while retaining choice for those who prefer a different approach.”
Branney emphasised that clear communication and member engagement would be crucial to the success of CDC schemes, adding that “the industry will need to work hard to get the design and delivery model right to operate at scale across workplace pension schemes”.
However, she maintained that “the prize is worth it”, and “the future looks far brighter for savers not part of the defined benefit pension world”.
Iain McLellan, deputy chair of the Society of Pension Professionals’ CDC committee, said: “By enabling collective risk-sharing and providing a route to a predictable income throughout retirement, CDC schemes have the potential to address one of the biggest shortcomings of the current defined contribution system: the challenge facing individuals of turning their pension savings into an income they can rely on for life.”
Providers eye product launches
WTW’s LifeSight defined contribution master trust set out plans to launch a retirement CDC offering earlier this year, once the regulatory framework had been confirmed.
Laura Mason, CEO of Legal & General’s (L&G) Retail division, hinted that her firm was also working on post-retirement offerings in line with the CDC and guided retirement proposed rulebooks, saying: “At L&G, we’re developing retirement solutions that combine flexibility earlier in retirement with greater certainty later in life.”
“CDC involves investment risk and, unlike an annuity, income isn’t guaranteed. The goal is to help each member find the right balance for them between income, flexibility and certainty.”
She cited the financial services giant’s research that indicated more than nine million people were “not on track for an adequate retirement”.
CDC “could be a valuable part of that landscape, but it is one option rather than a predetermined default”, Mason continued. “By pooling longevity risk and managing investments collectively, it has the potential to deliver higher expected incomes while taking complex decisions out of people’s hands.
“But higher expected income isn’t free. CDC involves investment risk and, unlike an annuity, income isn’t guaranteed. The goal is to help each member find the right balance for them between income, flexibility and certainty.”
An untested approach to retirement
Despite enthusiasm for the CDC model across the pensions industry, some commentators were more reserved in their reactions to this week’s publication.
Sam Cobley, a partner at LCP, said there was a “compelling case” for retirement CDC structures to offer an alternative to some of the other guided retirement offerings in development.
“However, retirement CDC remains a new and untested proposition both in the UK and wider global pensions landscape,” Cobley added. “We look forward to working with regulators, providers and clients to explore how it can be developed and fairly deployed in a solution future retirees can have confidence in.”
Beth Brown, partner at Arc Pensions Law, highlighted that income projections from CDC schemes would be targets and not guaranteed.
“There is a danger of treating retirement CDC predominantly as a product-design and actuarial exercise,” she said.
Brown added: “The terms of the governing rules for each arrangement will also be crucial. The legal architecture needs to work not only when the collective is performing well, but when difficult decisions have to be made.
“The scope for, and terms of, trustee discretion and decision-making in these sensitive areas will be paramount and should be agreed early.”
The draft regulations are open for consultation until 15 December.
