Simplify CDC rules to ensure success, says pensions industry

Proposed regulations for CDC pension schemes need refinement to ensure they succeed for potential multi-employer arrangements, according to industry experts.

The consultation on the CDC rulebook closed yesterday (19 November), with trade bodies and other interested organisations expressing strong support for the concept.

The rules build on the successful launch of the Royal Mail Pension Plan’s CDC pension fund last month, with a number of amendments made to make regulations suitable for providers serving multiple unrelated employers.

Legislation to facilitate multi-employer CDC pension schemes is expected to be rolled out next year, according to pensions minister Emma Reynolds, but may not feature directly in the planned Pension Schemes Bill.

The Society for Pension Professionals (SPP) earlier this week set out several recommendations for amendments to the proposals, including addressing what it sees as “unduly onerous” requirements in some areas.

In particular, the SPP warned that marketing rules could inadvertently limit the ways in which pension schemes could communicate with members.

Consultancy group LCP also flagged this issue, warning that “if left unamended, these provisions could deter non-commercial operators from entering the market”.

Ensuring the success of CDC pension schemes

Kathryn Fleming, partner at Hymans Robertson, described the consultation as “a welcome stepping stone towards CDC that offers great value for money”.

However, she warned that the proposals seemed “geared towards commercial schemes” and not enough consideration had been given to how industry-wide CDC pension schemes would work in practice.

LCP partner Helen Draper agreed, explaining that requirements related to what the proposals call the “scheme proprietor” work well for commercial arrangements but not for existing trusts that might want to set up a CDC section.

“This could limit opportunities for these members and employers, and we believe a more flexible approach is needed,” she said.

Fleming called for the government to “follow a less prescriptive approach” and instead focus on a “principles-based” regulatory framework. She said this would “give sufficient flexibility in the design of CDC schemes for innovation to flourish”.

Iain McLellan, director at Isio, said it was important for the multi-employer CDC scheme rules not to be too close to those brought in specifically to enable the Royal Mail arrangement.

“We would like to see greater flexibility introduced in a number of areas, including the frequency of updating accrual rates and contributions and how annual increases are calculated,” he said.

“We believe that this will lead to more innovative scheme designs and greater options for employers and their staff.”

Protecting all pension scheme members

Chintan Gandhi, partner and head of CDC at Aon, said the successful adoption of CDC pension schemes “has the potential to help over 30 million UK workers build up a pension”.

However, he called for the Pensions Regulator to ensure that members of all types of pension schemes received the same kinds of protection.

“For this reason, it is our strong view that all multi-employer CDC schemes should have a scheme proprietor and a specific person responsible for promotion and marketing,” Gandhi said. “In all cases, both must be assessed by TPR against the fit and proper person requirements.”

Simon Eagle, chair of the Institute and Faculty of Actuaries’ (IFoA) CDC working group, said the Department for Work and Pensions’ proposed rules were “a big step in the advancement of CDC schemes”.

“The IFoA’s view is that current pension provision in the UK, most of which is defined contribution, is in most cases not providing adequate solutions for all pension savers,” Eagle said.

“CDC schemes are a viable alternative which may offer a better deal for savers, and this consultation makes them a tangible option for employers.”

‘Choice is key’

TPT Retirement Solutions is actively exploring the creation of a CDC pension scheme alongside its defined benefit and defined contribution offerings.

David Lane, chief executive at TPT Retirement Solutions, said: “Choice for employers is key. Different types of benefit structure will be appropriate for employers in different sectors.

“Therefore, we believe that an expanded occupational pension scheme market will lead to better expected outcomes for individuals in retirement.”

The Church of England Pensions Board is also exploring adopting the CDC model for its pension scheme arrangements.

Ruari Grant, senior policy lead at the Pensions and Lifetime Savings Association, said: “These innovative models could provide tailored, lifelong incomes for millions in specific sectors, even if only a few are established initially.

“Success depends on striking the right balance – strong protections for members alongside flexibility for non-profit schemes to take the lead.”