The Department of Work and Pension has approved plans for the Royal Mail to launch the UK’s first collective defined contribution (CDC) pension scheme.
This confirmation was given in the DWP’s published its consultation on CDC pension schemes in the workplace. It said legislation would follow which would allow Royal Mail to create these pension arrangements.
This move was widely expected after the minister for pensions and financial inclusion, Guy Opperman confirmed at a recent TUC conference that proposals would be forthcoming
CDCs purport to offer a half-way house between defined benefit and defined contribution schemes. CDCs are collective schemes that aim to deliver a targeted fixed income in retirement, this however is not guaranteed.
This CDC consultation received more than 70 responses, most of which broadly welcomed the introduction of these new workplace pension arrangements.
Aegon’s pension director Steven Cameron says: “The Royal Mal and the Communication Workers Union will be pleased the Government has confirmed its support for a new form of pension scheme.
“Royal Mail clearly has the best intentions and we hope the scheme will deliver good outcomes for its members.”
However Cameron says the industry remains divided as to the merits of CDC, which orginated in the Netherlands. He says on the one hand it offers the potential ot pool investment risk and reduce charges.
But he adds: “Critics point to the complexity of explaining the scheme’s benefits to members and their incompatibility with pension freedoms. Individuals are told what their ‘target benefit’ is but this is not guaranteed and it is likely that actual benefits will be different from the initial target, making planning difficult.
“Most worryingly, there is a very significant risk that monthly pension income once in payment could fall. There is also the potential for one generation of members to subsidise another.”
He says that despite Aegon being owned by a Dutch parent company, it remains “unconvinced” that these will be the right option for many workers within the UK corporate pensions market.
However Aon were more receptive to the role that CDCs could play in the workplace pensions market. The company’s head of UK retirement policy Matthew Arends says: “We see the DWP’s response to the CDC consultation as an endorsement of the broader concept of Collective DC benefits for the UK – something we have been advocates of for many years. Much of what we see in the response confirms the direction of travel set out in the consultation itself.
“However, one thing that surprised us is the lack of additional controls over the setting of the actuarial assumptions to value the CDC target benefits – the DWP indicates that the Institute of Actuaries’ existing Work Review requirements will apply.”
He adds: “This could mean that there will be no external scrutiny of actuarial assumptions for CDC schemes until they are published after the actuarial valuation is complete. As the actuarial assumptions – and, in particular, the discount rate – will directly determine the pace of pay outs to members, we were expecting that more explicit, external review and ratification of the assumption setting would be required. This would increase public confidence in CDC schemes.”
Meanwhile Scottish Widows heads of policy for pensions and investments Pete Glancy added: ““CDC has the potential to be the ‘Marmite’ of the pension world. The smoothing and pooling of risks will be attractive to some employees, but potential restrictions in terms of pension freedoms will be unpopular with others.
“To succeed, it may be necessary to allow people to select their own pension scheme, like in Australia.
“Employees could select from a range of schemes including CDC and traditional DC. Employees who select a CDC arrangement could retain that arrangement as they move from job to job. Within the current AE framework, the most immediate opportunity for CDC could be in decumulation, where employees become individuals at retirement and pooling of risk could be attractive to some scheme members.”
The Pensions Regulator executive director of regulatory policy, analysis and advice David Fairs says: “We welcome innovation where it helps provide good outcomes for pension savers and sponsoring employers. We note the consultation response on CDC pension schemes. We will be working closely with government to ensure clear, effective and efficient regulation is in place and that communications to members are also clear and comprehensive.”