CDC legislation is 'on the way'

In its response to the consultation Extending opportunities for collective defined contribution pension schemes which ran from 30 January to 27 March, the Department for Work and Pensions acknowledged a role for CDCs as an "innovation" which could play a key role in plugging the UK pension gap.

Laura Trott pensions minister said CDCs could play a key role in, "driving investment towards the vital infrastructure that the UK needs".

She added: "Hard-working savers can benefit not just from higher pensions returns, but also through the rewards of wider economic growth."

The response to the consultation, which said draft legislation was being drawn up, was timed to follow Chancellor Jeremy Hunt's Mansion House speech, along with a raft of other proposed pension reforms and legislation.  

Trott said it was important to get CDC right. "It is not without challenges because members cannot rely on any guarantees, so CDC schemes need to be well designed, well run, and deliver good outcomes."

Scale of investment

The Pensions and Lifetime Savings Association said the legislation would need to allow for multi-employer and master trust CDCs while Claire Altman, managing director for individual retirement at Standard Life said there would be a challenge in achieving and maintaining scale.

She added: "There are also important considerations for employers, particularly in relation to the complexity of CDC and managing employees’ potentially incorrect expectation of guarantee.

"We are aware that many employers do not see CDC as something they want to engage in for understandable reasons – they have spent time and effort in ensuring auto-enrolment compliance and save for the most paternalistic of employers, there is no up-side to them of CDC.  

“We think that there are better solutions that meet peoples’ need for growth as well as guaranteed income in retirement which although on its face are addressed by CDC in its current form are more sustainable and fair and give a better outcome as well as supporting the intention to invest in the economy."

We will look forward to engaging in the debate on CDC and examine the extent to which its challenges can be overcome.

CDCs and risk sharing

Kathryn Fleming, partner at Hymans Robertson, said: “It is great to see yet another step forward in realising the goal of CDC having a key role in improving the retirement outcomes of many current and future savers. As a pension industry where DC savers have just gone through a period of investment volatility, resulting in some of those close to retirement losing value on their DC savings and having to delay or change their retirement plans, the attractiveness of CDC and other simpler to deliver, innovative risk sharing solutions, is in demand."

 “CDC is undoubtedly a game changer for the pensions industry, as for some it may realise these goals directly through the introduction of whole of life or decumulation only schemes.

Fleming added that CDC may not be the right choice so there is a need for product innovation.  "Providers and the industry need to support the creation of alternative risk sharing solutions that help members extract more value from their pension savings.

 “While CDC is a comprehensive approach to risk sharing as savers benefit from both investment and longevity risk being pooled, this results in it also being the most complicated.  The challenge to be tackled with CDC will be the ability to implement them fairly and to get traction from Provider, employers and members.  With increasingly alternative innovative approaches to risk sharing being considered, then next 12 months will be interesting to watch.”