The Government has finalised regulations for multi-employer collective defined contribution schemes (CDC) and will consult on retirement-only CDC.
This new regulations will be laid before Parliament tomorrow, with the consultation being launched by the Department of Work and Pensions.
Currently only the Royal Mail offers a CDC pension, but these new regulations will allow the expansion of CDC to more employers will pave the way for master trust CDC arrangements.
The Minister for Pensions Torsten Bell will set out the government’s plans for CDC in a speech at Aon’s officers to hundreds of employers today. This will outline steps to implementing these new pension arrangements.
Announcing the legislation Bell said: “Collective pensions offer savers a new option that in many cases will be a better deal, one where risks are shared, returns are smoothed and retirement incomes are stronger and paid for life.
“By expanding CDC to more employers and consulting on retirement CDC, we are helping build a fairer pensions system that gives people confidence their hard-earned savings will last and they can enjoy their retirement.”
CDCs pool pension schemes into a collective fund, effectively helping to share longevity risk. These arrangement give employees a regular pension payments for life in retirement – although this is not guaranteed. However it is hoped this will provided more security and higher average retirement incomes throughout retirement when compared to conventional DC arrangements.
The Government estimates with CDC plans workers could see their pensions increase by as much as 60 per cent, when compared to DC.
This launch of DC also fits into the wider government agenda of driving consolidation across the pensions market. Pooling funds into larger pension arrangements should also enable scheme to diversify their investment and direct more funds towards private markets. Through the Mansion House Accord the Government wants this to include investment in UK businesses and infrastructure projects, helping drive economic growth. The Government says this has been reflected in countries such as Canada and Denmark which already offer CDC arrangements.
Nausicaa Delfas, CEO, The Pensions Regulator says: “We are all working towards turning a savings system into a pensions system which provides a sustainable income through later life. Innovative solutions like retirement-only CDC schemes could play a part in this, and I’d encourage people to get involved with the upcoming consultation to ensure their ideas are heard.”
CDC Forum director David Pitt-Watson adds: “This is a major step forward for pension provision in Britain. If employers who sponsor pensions follow through, it will mean private sector workers, as well as those in the public sector, have an effective pension which will last them until the day they die.”
The announcement has been welcomed by the industry.
Aon partner and head of collective DC Chintan Gandhi says: “These regulations are a huge step for UK CDC. They will open up the market to multi-employer whole-life CDC schemes, including those provided by master trusts, enabling them to meet the needs of all employers and the self-employed – regardless of the size of their workforce or their contribution budgets.
“In offering employees whole-life CDC, employers’ and employees’ defined contributions can be pooled, together with investment and longevity risks being shared across the entire scheme membership. Crucially, whole-life CDC provides employees with an income for life in retirement that is expected to keep pace with the cost of living, and without individual employees needing to make complex decisions. It’s also exciting to see the emergence of a vision for retirement CDC which paves the way for all retirees – regardless of how they’ve built up their pension saving – to access the benefits of CDC when they retire.”
TPT Retirement Solution chief strategy officer Andy O’Regan says: “The publication of multi-employer CDC regulations marks a major leap forward for the UK pensions industry.
“For the first time, employers of all sizes will be able to access the benefits of Collective DC provision, paving the way for better outcomes for members and greater scale in this new model. The new rules will allow more workers to receive incomes for life in retirement, avoiding the need to make difficult decisions, while employers will maintain the cost certainty they have with DC provision.
“Earlier this year, we announced our intention to launch a multi-employer CDC scheme. We are also pleased to see that government has today published its plans on retirement CDC for consultation.
“Unlike the whole-life model, CDC in decumulation does not pool investment risk in accumulation, but it does take advantage of longevity pooling in a similar way, to provide a lifelong income in retirement. As such, this model could be of particular interest to DC schemes which will be required to offer members a ‘guided retirement default’ in future years. We will continue to engage with government to help shape the regime for this model.”
Hyman Robertson senior partner Jon Hatchett adds: “Today’s regulations are the final piece of the jigsaw needed for CDC to take off in the UK. Our research and work with employers has shown that multi-employer CDC master trusts are the vehicle that the vast majority of employers want for CDC. This is not a surprise when you consider the success and popularity of DC master trusts. We now have the regulatory certainty needed for providers to design and launch CDC schemes.
“It’s also good to see the focus on retirement CDC with the announcement of today’s consultation. Retirement CDC has an important role to play in the drive for greater adequacy, particularly for existing older DC members who will not be able to have the benefit of decades of saving into a whole of life CDC scheme.
“With the Pensions Schemes Bill including provisions for a default retirement approach that includes a degree of longevity protection, we expect it to play a prominent role as an ideal solution. It’s great that the Government is building on all the progress and effort that has gone into developing whole of life regulations; it means we should see retirement CDC come to life much more quickly.”
Zoe Alexander, executive director of policy and advocacy, Pensions UK says: “Multi-employer CDC schemes have the potential to boost retirement savings by sharing risks between savers. Success depends on striking the right balance between strong protections for members, simplicity and fairness of scheme design.
“We agree with Government that innovation in CDC carries huge promise for savers and are pleased that this Government is supporting the development of both multi-employer and at-retirement CDCs.”
