Webb backs mastertrusts to lead CDC vanguard

Risk-sharing schemes were added to the pension schemes bill to provide space for a middle way between defined benefit and DC schemes. 

Shared-risk schemes can include a range of defined ambition-style options, such as grocer Morrisons’ cash balance scheme, which places the longevity risk with the member rather than employer. 

I can’t see how CDC will work in the UK as the market is still too fragmented

Morten Nilsson, Now Pensions

But the CDC debate, Webb said, should be more focused on “risk-pooling”, in which the risk is removed from the employer completely and shared between members. “Every CDC [scheme] is one where the employer takes no risk,” he said. 

CDC has been criticised for creating potential intergenerational unfairness, and employers have been slow to voice support for a scheme that some fear may reintroduce DB-style risk to their balance sheets. 

Webb added: “Will smaller schemes go for it? No – unless there was an industry-wide one they could join.” The government is aiming to get the primary legislation in place next month. 

“We have to have the big stuff done by April 2016,” Webb said, but added the finer details will not necessarily be in place by that deadline.  

Webb said the prospect of mastertrusts offering CDC would be an “interesting angle”. Nest is currently asking the industry how collectivisation might work for the scheme, as part of a wider consultation.

One option could be to offer CDC as an add-on in a similar way to how Nest offers a sharia-compliant fund option to its members, Webb suggested. “Nest or other providers could have a collective bit."

However, mastertrust Now Pensions later said it had no intention of offering a CDC element in the near future. Chief executive officer Morten Nilsson said: “I can’t see how CDC will work in the UK as the market is still too fragmented.

“Members should only share risk with member groups with similar characteristics, and I don’t believe that many employers should or that many will be willing to take upon themselves additional pension liabilities.” 

He added the mastertrust will follow the market closely as the retirement product market evolves following the rollout of the new flexibilities this year. 

“We have already adapted our investment structure to reflect these freedoms, and while we will not rush into designing functionality to reflect the new environment, we will shortly be announcing our plans for April,” he said. 

Getting the comms right

Speaking at the TUC conference, Sandeep Maudgil, partner at law firm Slaughter & May, said getting the communications right over what is promised to members would be key. 

“If we’re going to float this as an alternative to a race to the bottom, we have to be clear this isn’t a DB scheme,” he said. 

Maudgil said he expected the regulations to specify that any “target benefit” must fall within a specific range. He added: “The reality is governance will be key and will impose heavy burdens on trustees.” 

Hilary Salt, a founder of consultancy First Actuarial, said at the TUC event that a “DB-minus” form of CDC would be less likely to gain traction, as a reserve would have to be built up through withholding members’ contributions, raising questions around fairness. 

“Most people now have got crap DC, they’ve got 1 per cent DC,” she said. She added "DC-plus" CDC would mean members receive their target pension based on their age and the markets, and would remove the need to build up a scheme reserve. 

Salt also said CDC would demand a mastertrust-type trustee role. She said: “CDC only works if you trust the trustees… which is why that role is vital.”