Steven Cameron, Pension Director at Aegon, comments: “The Royal Mail and its Union will be pleased the Government has confirmed its support for a new form of pension scheme, Collective Defined Contribution (CDC), for its employees. Royal Mail clearly has the best intentions and we hope the scheme will deliver good outcomes for its members.
“However, the industry is divided on the relative merits of CDC, which originated in the Netherlands. Supporters point to them offering greater certainty to individuals compared to Defined Contribution (DC) with the potential to pool investments and reduce charges. 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.
“At Aegon, we are open to new pension scheme designs being explored, but despite our parent company being based in the Netherlands, we are not convinced ‘going Dutch’ with pensions will be right more broadly within the UK. There are huge challenges in automatically enrolling individuals into a scheme with such complex design features. CDC won’t offer members a choice of investment funds and importantly may not provide access to the pension freedoms which have proved highly popular in allowing people to draw down from their pension flexibly. While we believe individuals may be allowed to transfer out to access freedoms, the terms for doing so are far from clear.
“We wish the Royal Mail every success with their scheme, but it is imperative that before enabling other employers or master trusts to go down this path, full consideration is given to how to address the many challenges CDC present, including to member understanding and security.”
Steve Webb, Director of Policy at Royal London said: “It is good that the Government is moving forward with CDC scheme as part of the pension landscape, but the proposed legislation will be very narrow in scope. Even for the Royal Mail it is likely to be several years before a scheme could be up and running. If others employers want to use a different model, this could need new primary legislation and we would probably be talking about the mid 2020s before further schemes could be in place. One of the key features of CDC schemes elsewhere in Europe is the presence of a capital ‘buffer’ to smooth the ups and downs of investments, and it is disappointing that the proposed legislation will not allow for this. I strongly suspect that the Government has very limited legal resources as civil servants are being diverted to work on Brexit-related legislation, and this is limiting their ability to produce more comprehensive legislation on CDC”.
Rob Harper, Partner at Hymans Robertson comments: “Attaining an adequate, sustainable retirement income continues to challenge many UK workers since the shift in the balance of risk across from employers to individuals. There are clear benefits to be had from pooling of these risks across individuals and today’s commitment to CDC from the Government is a step in the right direction. Compared to annuitisation and drawdown, CDC could potentially deliver more sustainable retirement incomes in an alternative and pragmatic way by pooling risk for members, particularly in the later stages of their retirement. However, the advantages of CDC in the pre-retirement ‘saving’ phase compared to current DC schemes remain less clear.
“Ensuring clear member communications and strong governance are vital if CDC is to succeed and I’m glad the Government has recognised this in its response. Pension provision is already far too complicated for many savers to fully understand and early transparency from employers and providers will aid member understanding of what CDC really means for them.
“The Government has also acknowledged industry concerns that its original proposals may be too restrictive by limiting CDC to single-employer schemes and I welcome their commitment to looking at this again in the future. Widening this criteria to include vehicles such as multi-employer schemes and Master Trusts may allow them to consider offering CDC sections to their members, which we believe would be an attractive proposition for both schemes and individuals.
“CDC is not a ‘one size fits all’ solution and I’m pleased the Government understands this. The sheer scale of assets and membership required to pool risk safely will limit this option to only the very largest schemes such as the Royal Mail or other arrangements that can achieve sufficient scale.”
|
