Aon's Chintan Gandhi: We urge government to press ahead with plans to legislate for whole-life multi-employer CDC schemes in 2024
The government has responded to its consultation on extending opportunities for collective defined contribution (CDC) pension schemes – saying it would publish draft legislation on the way forward later this year.
The government's consultation response - published today (11 July) - noted the increasing interest and appetite across the pensions industry for delivering CDC schemes and set out the Department for Work and Pensions' (DWP) proposed way forward, which it said would be realised through secondary legislation which it will publish in draft later this year.
Pensions minister Laura Trott said: "Our intention is that the framework should accommodate schemes providing benefits to unconnected multi-employer schemes and master trusts, and to explore how best to provide for schemes offering CDC decumulation products."
Trott added: "I believe CDC has huge potential to benefit pension savers. At a fixed cost to employers, they can have the assurance of an affordable regular income in retirement by sharing risk, smoothing the impacts of market movements and other factors which otherwise would drive volatility and deliver wildly unpredictable outcomes.
"By reducing and mitigating the risks faced by members these schemes can take advantage of the ability to invest in more productive assets. This enables CDCs to play a key role in driving investment towards the vital infrastructure that the UK needs."
The consultation come the day after chancellor Jeremy Hunt announced his Mansion House Reforms - measures that included a statement that the government would encourage the creation of collective DC schemes, which the Treasury said were aptly placed to deliver effective investment through their pooled set up.
Trott said savers in CDC schemes could benefit not just from higher pensions returns, but also through the rewards of wider economic growth of CDC investment in productive assets - but added the design of such schemes needed to be right in order to achieve this.
She explained: "That is why it is important to get CDC right. It is not without challenges because members cannot rely on any guarantees, so CDC schemes need to be well designed, well run, and deliver good outcomes."
‘Press ahead'
The Association of Consulting Actuaries (ACA) said it was "strong supporters" of new CDC schemes, which it expected to be "natural buyers and long-term holders of growth assets".
It said it expected the improvement to member outcomes through implementing CDC could significantly exceed the 12% suggested by the chancellor due to reform to defined contribution (DC) investments alone.
The ACA added: "This means the quickest win for the chancellor could be to rapidly apply the accelerator pedal to widen the scope of CDC schemes."
TPT Retirement Solutions employer and strategic partnerships director Andy O'Regan said that employers, scheme members and the wider economy could all benefit from the broader introduction of CDC.
He said: "CDCs provide a whole-of-life pension which would be expected to provide better outcomes for members compared to DC alternatives at the same cost. Compared with DB, CDC is much less burdensome and costly for employers. Firms can still offer their employees a generous pension, but it doesn't require the open-ended sponsor guarantee.
"We're already speaking with employers who may potentially be interested in joining a CDC scheme. This type of scheme could particularly be attractive to any employers who want to get the most out of their pension contributions to ensure their staff are well taken care of in retirement. CDC could help these firms to attract and retain talent by standing out from their competitors."
Aon partner and head of CDC Chintan Gandhi agreed the benefits of CDC were becoming increasingly recognised as meeting many individuals' needs in retirement saving - and he urged the government to "press ahead swiftly" with reform.
Gandhi said: "Aon has been publicly committed to the introduction of CDC in the UK for over a decade and has already done considerable work in supporting employers and providers in developing their CDC vision. Through this work it is clear that there is strong demand for CDC and we are pleased to see the government has heard industry calls for the extension of CDC to accommodate multi-employer whole-life schemes."
He added: "We therefore urge government to press ahead swiftly with plans to legislate for whole-life multi-employer CDC schemes in 2024, and for The Pensions Regulator to consult on its own extended CDC guidance - so that this does not further delay the opportunity for around 30 million working people, and their employers, in the UK to have access to building up a CDC pension during their working lives."
Lane Clark & Peacock partner Steven Taylor agreed the government should now set out the key principles of reform quickly.
He said: "Many of our large pensions clients have been awaiting today's CDC developments keenly, many having contributed to government planning and helping to set out the new features needed for CDC schemes to emerge as a force.
"Chief amongst these are expected flexibilities on how CDC pensions build up, such as age related scales, that will help schemes to be fair for future generations. Setting out these principles quickly, for multi-employer schemes, also makes sense as commercial considerations for ‘decumulation only' schemes will need to be thought through separately."
Decumulation only CDC
Aon added it was "disappointed" that these decumulation-only CDC appeared to have been "kicked into touch".
Aon associate partner and CDC specialist Madalena Cain added: "We are disappointed that decumulation-only CDC appears to be kicked further into touch - although we accept that further work is needed to establish how this commercial market will work."
Cain said its power of pooling research into the value of CDC in decumulation showed how valuable CDC looks set to be alongside existing pension options in retirement - speculating that CDC could eventually become a default decumulation option at retirement.
She said, while such an option did not currently exist at an industry level in DC, the value of a decumulation default was widely recognised in a culture where pension savers have not been required to make any decisions during the accumulation of their pension.
Cain noted: "We therefore support the DWP's and pension minister's view that CDC decumulation solutions help provide members of traditional individual DC schemes efficiently turn pension pot into income. We also support their desire for pension schemes to consider how CDC could feature in their offer to members. However, we would go one step further and see value for CDC to be a mandatory option available to all retirees from DC schemes."
She added: "Regardless of whether retirees have built up their pension saving in DB or DC schemes, we believe CDC as a decumulation-only option paves the way for a very exciting future for UK pensions - and could be most valuable for those approaching retirement in the coming years who have not had the opportunity to build up a whole-life CDC pension.
"We therefore urge government to confirm its commitment to introducing decumulation-only CDC by publishing a plan to legislate for this form of CDC."
CMS partner Keith Webster said the government's CDC response acknowledged the important role decumulation-only CDC could play in helping DC members achieve better retirement incomes but seemed a long way from being able to deliver it.
He said: "The suggestion that DC master trusts could be required to have CDC as a default option is a positive move. But the government seems a long way from being able to deliver a CDC solution to the problems DC members face in retirement."
