Government gives green light to CDC schemes, but questions remain

Last year, the Department for Work and Pensions launched a consultation on CDC – a new type of scheme that has mainly been driven by Royal Mail and the Communication Workers Union.

There remain some significant issues that need to be addressed before CDC should be rolled out more generally

Steven Cameron, Aegon

CDC pension provision involves pooling and investing contributions with a view to delivering a target benefit level.

In its consultation response published on Monday, the government gave the green light for this type of scheme to join the market.

Amber Rudd, work and pensions secretary, said in a statement that the move is “yet another revolutionary reform in this Government’s quest to transform the retirement saving culture in this country”.

She added: “These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators.”

Jon Millidge, chief risk and governance officer at Royal Mail, welcomed the progress, noting that Royal Mail and CWU have been campaigning together to bring about the legislation.

Similarly, Terry Pullinger, CWU deputy general secretary postal, said: “The response to the consultation on these proposals, and the degree of support from many key players, confirms our belief that the pensions industry is in genuine need of scheme innovation.”

Govt prioritises single employer model

Responses to the consultation showed there is a strong appetite for CDC benefit provision in the UK.

The government was “extremely heartened” by the number of responses calling for the legislation to be widened to provide for other CDC models, including master trusts and multi-employer schemes.

However, it pointed out that its initial priority is legislating for CDC schemes set up by single or associated employers.

The government said it will not be opening up its legislation to other models immediately, but will start working with interested parties to shape out legislation for wider models once the Royal Mail scheme has been set up.

Wider adoption could take years

Steve Webb, director of policy at Royal London, said this narrow scope means it could be years until we see wider adoption of CDC.

There will probably be a pensions bill in the Queen’s speech this year, but that may take a year to go through parliament, according to Mr Webb.

There is then secondary legislation, which often has to be consulted on. “So we’re probably talking 2021 before the legislation’s through – at the earliest”, he added.  

“Even the Royal Mail one, which has got an enthusiastic employer and an enthusiastic union, is several years away, and my big worry is if this legislation is broadly to facilitate that one model… a single employer scheme, the extension of this principle is years away,” Mr Webb noted.

Questions unanswered

Nathan Long, senior analyst at Hargreaves Lansdown, argued that the government’s consultation response left a number of questions unaddressed.

For example, “they recognise that there is a need for a charge cap, [but] they don’t know what shape that’s going to look like at the moment”, he said.

Furthermore, he pointed out that some questions remain over transfers.

Schemes are legally required to make sure a member has taken independent financial advice before making defined benefit to DC transfers of £30,000 or more.

A number of respondents to the CDC consultation suggested that members seeking to transfer out CDC benefits should be required to take similar advice.

While the DWP has recognised that there is probably a need for advice, “they don’t think that they can dictate that advice is taken at this point in time while the market’s still effectively non existent – so they’ll just continue to monitor it,” Mr Long noted.  

And with regard to using CDC for auto-enrolment purposes, the DWP said they have taken into account the consultation responses, and they are in talks with the Government Actuary’s Department over what level of accrual rate might be appropriate for CDC plans.

Mr Long said: “There’s lots of things here where they’ve taken the feedback on board, realise that they don’t have really any answers to these issues, because it’s not existed before,” so they are waiting to see how things develop.

Communication crucial

The consultation paper also set out the outline of an authorisation process for CDC schemes, overseen by the Pensions Regulator, and details are still being discussed with the watchdog.

David Fairs, executive director of regulatory policy, analysis and advice at the regulator, said: “We welcome innovation where it helps provide good outcomes for pension savers and sponsoring employers.”

He added that the watchdog “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”.

Members will need to recognise from the start that the target benefit levels may not be achieved, and that the level at which pensions are paid may decrease.

Steven Cameron, pensions director at Aegon, said it will be crucial to focus on good communication so individuals understand what is involved.

“Otherwise, the member might find themselves in a situation that they didn’t anticipate, and could then complain to the scheme that they didn’t communicate some of the risks of CDC fully enough to them,” he noted.

Mr Cameron is not convinced that CDC will be suitable for the wider UK population.

“Where there could be benefits, we think that some of them are questionable and there remain some significant issues that need to be addressed before CDC should be rolled out more generally,” he said.