All large employers should be looking at CDC options in order to deliver better retirement outcomes for members.
This was one of the conclusions of a panel discussion at Corporate Adviser’s Master Trust and GPP conference, held today in London.
Employers in particular are enthusiastic about the change these new arrangements could offer. Associated British Foods group pensions director Colin Hately said: “It would be remiss of any employer not to be look at whole-of-life CDC or decumulation only CDC options.”
He added that these new pension arrangements clearly present an opportunity to change the way many people think about their workplace pensions. He gave the example that DB members of AB Food’s scheme primarily conceptualise their pension as an income stream. “They do not see this as a huge pot of money that is ‘theirs’.” He said that if CDC can change this mindset regarding DC this would be a positive outcome.
The panel added that this would appear to align with the aims of the new Labour government, which has recently imposed IHT on pensions, and wants to ensure the tax-breaks offered go towards providing an income for life not as a future inheritance, even if various surveys show that many people want to be able to pass on pension savings.
However others on the panel were less enthusiastic about CDC. Pete Glancy head of policy at Scottish Widows said there was still a degree of confusion with different parts of the industry “with ever longer equations” trying to prove whether or not this will deliver for members. He added that there was also an agruement that rather than creating products, the current system could be evolved and improved to deliver on these aims for savers.
Margaret Snowden OBE and senior independent director at XPS Pensions Group added that there was a need for flexible solutions that recognises that people had very different needs. “We can be too black and white on this issue.”
The panel also discussed the potential impact of the new Value for Money framework on workplace pensions. Snowden said it seemed likely that this would drive up costs for workplace schemes.
The VFM reports are likely to be complex necessitating considerable investment in people who can communicate this information and ensure that these schemes are delivering value. This will result in more costs within the system she added.
“At the end of the day employers to want be able to trust that their pension scheme is delivering this value.” She said that these metrics were in some ways reminiscent of the work she had previously, working on an IGC, when they were first launched. However she pointed out that at the time the detailed information published on services, investment returns and other factors was “slammed by the FCA”. “At the time the answer was a cap on fees.”
“Now we have a cap on fees we are looking at other ways to benchmark fees but this is like to result in higher costs.”
Glancy welcomed the move to VFM. He said that this can help deliver a shift from cost to value.
As a pension expert representing employers Hateley was also positive about the effect of this new VFM framework and welcomed better benchmarks with which to compare different schemes. “We welcome the fact that this will introduce a degree of consistency”. He pointed out that som of the information that will be included in VFM metrics is not dissimilar to the information presented in chair’s statements. But he adds that “It is very difficult to have meaningful comparisons between these statements at present.”
The panel agreed that they would also like to see the DC market develop to have a wider focus on lifetime and retirement savings, rather than be solely focused on pension products. There was also a degree of enthusiasm for product that might enable people to access funds in certain circumanstances, particularly to purchase a first home.
Hateley pointed out that this is successfully done in many parts of Europe. “We just need to keep in simple and not overly complicate matters, with clear rules on what proportion of a fund can be accessed at particular ages.” He did point out though that this would necessitate a different approach to investment glidepaths.
Glancy said that the pension industry could also be important in helping channel greater investment into social housing. “The biggest problem is many people simply do not have the headroom for saving, whether it is for emergency funds, a first home or a pension.”
He pointed out that social rent is currently £850 a month less than in the private sector. “If the pension industry invested significantly in social housing and this resulted in far more properties being available in this sector this could give the headroom people need for saving.” This would be beneficial to the pensions and savings industry too he said if it resulted in higher savings levels he added.
The panel were also strongly supportive of moving towards a single regulation. Snowdon pointed out that the TPR’s stated desire to move towards risk-based regulation, with a focus on a smaller number of larger schemes was potentially misguided. “In my experience as a regulator it was often the smaller schemes that caused the difficulties,” she said.
