The Department of Work & Pensions has published its consultation document on retirement-only CDC, setting out how these proposed new pension arrangements might work in practice.
It is seeking views from trustees, providers and employers on the proposals, who have six weeks to lodge their response.
The consultation makes clear that the government is proposing that these new arrangements are primarily offered through master trust providers, so will be supervised by The Pensions Regulator. The DWP says it is not seeking to be prescriptive about scheme design, but says it is essential CDC benefits are subject to annual valuations and adjustments, in order for these schemes to be sustainable.
The DWP proposals says these new pension arrangements would not seek to deliver a guaranteed income, but would look to target benefit increases over the course of a retirement.
It adds that it expects some providers to offer retirement-only CDC as their default pension benefits solution, which schemes will soon be obliged to offer under the terms of the Pension Schemes Bill.
Retirement CDC schemes differ from a whole-life CDC arrangement, as it would see individual DC member pots placed into a collective fund at retirement, allowing them to effectively pool investment and longevity risk.
The Government is hoping that this will allow these schemes to invest a higher proportion into growth-seeking assets, potentially delivering a higher return to members.
The DWP says it is not seeking to prescribe a single model for scheme design. It says it is aware different organisations are exploring a range of potential scheme designs, which might vary on how underwriting is used to reflect individual health or demographic factors, whether death benefits are included, and options around inflation-linked increases and the option to provide lump sum payments in certain circumstances.
However the consultation document says CDC benefits should be subject to annual valuations and adjustments, and that this mechanism wold be “central” to the success of the CDC model, ensuring these schemes remain sustainable over time.
The consultation says retirement CDC might be offered as a default pension benefit solution under the member’s own scheme, or members may be transferred into an external scheme to access these new CDC arrangements.
But the Government says it is also important to consider the member-borne risks of retirement CDC, which can include benefit cuts and potential inflexibility, depending on how the solutions are designed. It is seeking feedback from interested parties on this element too.
The consultation says feedback will inform further thinking on how such provision might be facilitated by trust-based pension providers and help the government understand the specific regulatory challenges the scheme design might post.
It is envisaged that retirement-only CDC schemes will operate under trust law, and essentially be provided as a ‘section’ of a master trusts or unconnected multiple-employer scheme (UMES). The DWP says this ensures that these new schemes would be subject to high levels of scrutiny, and would be regulated by The Pensions Regulator (TPR).
The consultation document says: “This approach also has the advantage of preventing a large proliferation of schemes as Retirement CDC would be limited to providers of Master Trusts or UMES. These schemes will also be able to draw from the economies of scale and operational expertise of their wider organisations. ”
It adds that allowing retirement CDCs to operate as sections of master trusts might more easily allow trustees and managers to design solutions which combine retirement options. For example, trustees may design a default pension plan which splits between drawdown and CDC benefits, where drawdown is facilitated through the DC master trust section, and CDC benefits through the retirement CDC section of the scheme. It says there must be appropriate separation of CDC benefits from other benefits within the overall scheme.
Announcing the consultation the pensions minister Torsten Bell says: “The time is ripe to consult on these next steps. The Pension Schemes Bill 2025, which is currently being debated in Parliament, places duties on DC scheme trustees or managers to have in place a default pension plan for their members which are designed to, in most cases, provide a regular income, protection against longevity risk and from complex decision making, something that retirement-only CDC schemes would be able to provide.
“Our test is to provide pensions in exchange for people’s hard-earned savings – not just pots of savings.”