The government is to pave the way for collective defined contribution (CDC) pension schemes with legislation heading for parliament this week, it announced today.
It will also consult on a separate framework for “retirement-only” CDC offerings, which could boost the decumulation options available to traditional DC schemes. These will be required to offer a default decumulation pathway for members under rules set out in the Pension Schemes Bill.
CDC pension schemes combine members into collective funds to spread risks across larger cohorts pre- and post-retirement. Multiple studies have indicated that CDC arrangements could provide substantially higher pensions for members for the same contribution levels.
“Collective pensions offer a better deal, one where risks are shared, returns are smoothed, and retirement incomes are stronger and paid for life.”
Torsten Bell, pensions minister
Torsten Bell, the pensions minister, said: “Too often people approaching retirement are left navigating complex choices and shoulder risks they shouldn’t have to face alone. Collective pensions offer a better deal, one where risks are shared, returns are smoothed, and retirement incomes are stronger and paid for life.
“By expanding CDC to more employers and consulting on retirement CDC, we are helping build a fairer pensions system that gives people confidence their hard-earned savings will last and they can enjoy their retirement.”
The legislation for unconnected, multi-employer CDC pension schemes will be laid in parliament tomorrow (23 October). The Department for Work and Pensions (DWP) said in a press release that it expected the regulations for retirement-only CDC to be based on the same framework.
‘A major step forward’
This week’s announcement follows the introduction of single-employer CDC legislation that paved the way for the launch of Royal Mail’s CDC offering last year.
David Pitt-Watson, director of the CDC Forum at the Royal Society of Arts, said introducing multi-employer legislation was “a major step forward for pension provision”.
“If employers who sponsor pensions follow through, it will mean private sector workers, as well as those in the public sector, have an effective pension which will last them until the day they die,” he added.
Aon – which has been a champion of the CDC concept for several years – hosted the official launch of the legislation today (22 October) at its London office.
Chintan Gandhi, partner and head of CDC at the consultancy giant, said: “Crucially, whole-life CDC provides employees with an income for life in retirement that is expected to keep pace with the cost of living, and without individual employees needing to make complex decisions.
“It’s also exciting to see the emergence of a vision for retirement CDC that paves the way for all retirees – regardless of how they’ve built up their pension savings – to access the benefits of CDC when they retire.”
Retirement-only CDC consultation launches
Alongside the legislation, the DWP is also launching a consultation on retirement-only CDC schemes, which would pool cohorts of members to share risks such as longevity.
The government aims for these to contribute to the guided retirement system that will be introduced through the Pension Schemes Bill, requiring traditional DC schemes to offer a default decumulation option to their members.
The DWP said in a press release that retirement-only CDCs offered an “additional innovation allowing more people to enjoy the perks of CDC”.
“Innovative solutions like retirement-only CDC schemes could play a part in this, and I’d encourage people to get involved with the upcoming consultation to ensure their ideas are heard.”
Nausicaa Delfas, the Pensions Regulator
Andy O’Regan, chief client strategy officer at TPT Retirement Solutions, said: “Unlike the whole-life model, CDC in decumulation does not pool investment risk in accumulation, but it does take advantage of longevity pooling in a similar way, to provide a lifelong income in retirement.
“As such, this model could be of particular interest to DC schemes which will be required to offer members a ‘guided retirement default’ in future years. We will continue to engage with the government to help shape the regime for this model.”
TPT announced its plan to launch a multi-employer CDC scheme in May, soon after Torsten Bell confirmed that the legislation would be published this year.
Nausicaa Delfas, chief executive of the Pensions Regulator, said: “We are all working towards turning a savings system into a pensions system which provides a sustainable income through later life. Innovative solutions like retirement-only CDC schemes could play a part in this, and I’d encourage people to get involved with the upcoming consultation to ensure their ideas are heard.”
‘Scheme design vital’: What the industry said
