Several master trusts would welcome the ability to offer a collective defined contribution solution for their members in decumulation, after the government hinted at such a possibility.
October’s Pension Schemes Bill included provisions for the establishment, operation and regulation of CDC schemes. These funds will pay members a target wage in retirement, which can be revised upwards and downwards according to investment performance.
The Department for Work and Pensions has also stated that it is considering opening up this benefit format to be used by master trusts in the future, which could be achieved by secondary legislation.
Smart Pension is one of the workplace pension providers that would like to offer the option to its members.
Nest has no plans to become a CDC scheme using the legislation introduced in the Queen’s Speech. But we are clear that risk sharing, which can be achieved in a variety of ways, has the potential to help deliver the more predictable income in retirement that we know many of our members want
Zoe Alexander, Nest
Darren Philp, director of policy and communications at the company, told Pensions Expert: “We can certainly see the appetite for CDC to be offered within a master trust environment like ours in the future.
“While we are already developing an innovative decumulation solution (Smart Retire), it could provide a useful additional tool in helping to keep people’s money growing and managing volatility around at-retirement.”
Mr Philp noted that the regulatory framework would have to be in place before it could happen, but “it is good that DWP is open to looking at this in the future”.
He added: “There’s also some tricky questions that would need to be ironed out, not least around fairness and individual responsibility, but in the future people will be crying out for solutions that help them secure an income in retirement.
“It’s a little way off yet, but in years to come CDC will no doubt be part of the mix.”
CDC transfers make providers uneasy
CDC schemes differ from defined benefit pensions in the sense they do not guarantee certain incomes in retirement. Instead, CDC have a target amount they will pay out, based on a long-term, mixed-risk investment plan.
The schemes also differ from the traditional defined contribution plans in that they do not produce individual pension pots. Instead, they invest savings in a larger collective pot, which provides an income to individuals during their retirement.
Royal Mail is the first company looking to set up one of these plans, after reaching an agreement with the Communication Workers Union and gaining approval from workers in April 2018.
Adrian Boulding, director of policy at Now Pensions, noted that there are pros and cons of implementing such a solution.
He said: “A CDC version can provide greater smoothing of investment returns between good and bad years and enable a more stable level of income to be suggested. It can also pool the longevity between members, removing the need for individuals to hold money back in case they live longer than expected.
“But I think this pooling comes at the price of giving up the clean exit that a pure DC scheme offers. And we should be cognisant that given the great length of retirement today, pensioners may wish to switch schemes later on in their retirement.
“CDC schemes may offer no transfers out at all, and even where they do the amount of the transfer value will be a contentious figure arising from black box actuarial calculations.”
Since Now Pensions’ members have not yet built up enough funds for decumulation options, the provider has not decided on what type of solution it will offer, and if it will include a CDC solution, Mr Boulding noted.
Gregg McClymont, director of policy at The People’s Pension, said at the Pensions and Lifetime Savings Association’s annual conference in Manchester, in October, that the distinction between CDC in accumulation and decumulation is important, and that the benefits of the former can be achieved by scale in large master trusts.
He said: “The pooling dimension is achieved by economies of scale, you can hold assets a long time, you can distribute them among different members’ cohorts.
“The question is in the retirement phase, and whether sharing longevity and investment risk is a more efficient way to proceed. I think it is an open question about whether CDC has a role to play in the retirement phase.”
Nest still believes in risk sharing
On the other hand, government-founded master trust Nest is not considering a CDC option, being barred by legislation from entering the decumulation market at present.
Zoe Alexander, Nest’s director of strategy, said: “Nest has no plans to become a CDC scheme using the legislation introduced in the Queen’s Speech.
“But we are clear that risk sharing, which can be achieved in a variety of ways, has the potential to help deliver the more predictable income in retirement that we know many of our members want.”
Minimum AE contributions cannot achieve ‘comfort’ in retirement
The industry has welcomed the Pensions and Lifetime Savings Association’s retirement income standards, but experts warn current minimum contribution levels are not enough to get savers over the line from a moderate to a comfortable lifestyle standard.
Ms Alexander argued that this is incorporated in the provider’s plans for retirement pathways, first published in 2015. The government has denied previous requests to allow Nest to develop drawdown products, as suggested by the Work and Pensions select committee in 2018.
She added: “We continue to believe that such pathways are the right solution for many people who have been brought into saving by automatic enrolment and now face a very complex set of decisions about how to manage their money through retirement.”
