The Department for Work and Pensions (DWP) wants to expand the framework which will allow collective defined contribution (CDC) schemes to be rolled out in the UK.
Current regulation will come into force from 1 August 2022, with the introduction of single-employer collective schemes.
A CDC pension allows contributions to be pooled and invested to give members a target benefit level that enables the sharing of longevity risk between members.
Speaking at the CDC Forum on 28 March 2022, pensions minister Guy Opperman said the schemes have the “potential to transform the UK pensions landscape and deliver better retirement outcomes for millions of savers”.
“I firmly believe that we should capitalise on the enthusiasm that is building for extending CDC to other types of pension scheme, such as multi-employer schemes and master trusts. I am keen to move quickly, but we must get this right if it is to work. That is why I am calling on all those who are seeking to deliver the full benefits of CDC to work with us to help make this a reality.”
The DWP will unveil a consultation later in the year on how to expand the current CDC legislation.
This follows calls from companies which have expressed interest in pursuing multi-employer CDC schemes as well as ‘decumulation only’ models, where savings are converted to retirement income, according to the department.
Future developments
Kathryn Fleming, partner at pension consultancy Hymans Robertson, said: “It is good to see the announcement from the DWP today that it will be consulting later in the year on different approaches to accommodate new types of CDC schemes.
“While the recent Pensions Regulator (TPR) consultation showcased a range of measures to improve member communication, which we agreed with wholeheartedly, our analysis indicates that despite the fact that a compelling case can be made for CDC, there are still a number of areas of concern.
“The complex task of scheme design is important and different designs can make the benefits of CDC less clear-cut for some members. Furthermore, achieving good member outcomes during the early years of establishing a scheme is likely to be more challenging than for an established scheme in a steady state.
“There is also an issue about the costs and scale of investment required for the setting up of a scheme which meets the requirements of the draft code of practice. Finally, we believe the appeal of CDC is best suited for a niche group of employers and arrangements such as master trusts would be of more value and greater benefit to a wider audience.
“CDC has the scope to add value, and ultimately improve outcomes through greater education and better decision making. The ability to pool longevity and investments to deliver more income has strong appeal if introduced in tandem with a strong communications package. However, given the scale of investment and innovation already underway in DC master trusts, being patient and taking advantage of those improvements could be the most realistic and straightforward course of action.”
Some of the companies that have already expressed interest in rolling out a collective plan for their employees include Royal Mail and the Communication Workers Union.
