The Department of Work and Pensions has launched a consultation on proposals to expand collective defined contribution (CDC) schemes to include multi-employer schemes and decumulation-only versions.
Currently the CDC legislation only allows for single, or connected employers, but the government is looking to widen access. It proposes the first step should be multi-employer schemes, which would operate across the accumulation and decumulation stage.
The DWP said proposals could cover master trusts but said there may be some areas where different considerations will be appropriate for schemes established on a commercial basis.
The DWP said it is also seeking views whether there is a place in the market for CDC decumulation-only products. In both cases it is suggesting that regulatory oversight will be provided by The Pensions Regulator (TPR).
The proposals have been broadly welcomed by the industry. LCP partner Steven Taylor says this consultation follows detailed technical discussion with industry over the past year around how to best make CDCs work for multi-employer schemes.
He adds: “It is hoped that this will now fast-forward the emergence of a new brand of pension that can provide today’s employees with better expected outcomes than traditional defined contribution schemes.
“In today’s climate the ability of CDC schemes to target full inflation protection could also be a key selling point for members, whilst employers will be attracted by immunisation from future deficits.
“Squaring this circle to ensure good member outcomes means CDC schemes need to invest heavily in equities and other growth areas. This aligns will with the Government’s wider objectives, but also makes investment strategy a key focus for scheme designs. There is much to admire here and it is hoped that over coming months the consultation progresses smoothly.”
He adds that central to this will be the ““evolving thinking” around decumulation-only models. “Once operational, these schemes could be very attractive to the current generation of private sector savers who have only ever known DC schemes, especially if , as hoped, they can offer significantly higher starting pensions than traditional annuities.“
Willis Towers Watson senior consulting actuary Shriti Jadav says: “We see this [consultation] as a significant step towards meeting the Government’s ambition of making CDC more widely available through facilitating multi-employer schemes, master trusts and decumulation-only CDC.
“The consultation focuses on whole-life multi-employer CDC schemes to extend CDC provision and notes there are additional factors to consider with decumulation-only schemes such as around the pricing mechanism. We hope the DWP maintains progress on the decumulation-only approach alongside the whole-life multi-employer model, so that people who have saved in conventional DC schemes have the option to remove the risk of outliving their money without having to lock into the low-risk, low-return investment strategies that underpin annuities. Polling from WTW’s recent Pensions and Savings Conference showed that 93 per cent of attendees felt that a CDC decumulation option would be of interest to DC retirees, and 72 per cent would consider facilitating that through a link to an external offering such as a master trust.
“The cost of living crisis underlines the challenges of improving DC pensions through higher contributions alone, and product innovation can help make the most of those hard-earned contributions.”
Pensions and Lifetime Savings (PLSA)Association head of DC, master trusts and lifetime savings Alyshia Harrington-Clark says: “CDC schemes have the potential to boost retirement incomes for savers, so we welcome this consultation which considers extending the regulatory regime to multi-employer and decumulation-only models.
“These are complex developments though, with challenges, including fairness between generations and member communications around the variability of benefits, so we look forward to close cooperation between industry and government as we seek overcome these and establish a framework which leads to better retirement outcomes.”