The government has given its strongest support yet for collective defined contribution (CDC) pension schemes ahead of its November consultation.
Responding to a report from the Work and Pensions Select Committee today, 18 October, Pensions Minister Guy Opperman said that it would be considering all of the Committee’s recommendations in order to “eliminate employer exposure to unanticipated costs” and access “better outcomes”.
Opperman added that the consultation will consider issues around risk sharing, methodology for cash equivalent transfer values, whether transfers should consider financial advice and effective member communication.
In his response, Opperman wrote: “You recommend that government should act quickly to legislate, and that it consult on certain aspects. As you acknowledge, there are a number of issues that need careful consideration and handling if this type of scheme is to be properly run, and if members are to have confidence in it.
“You suggest that CDCs - if designed and true in an appropriate manner - have the potential to enhance the pension landscape. This is why we intend to hold a formal consultation in the autumn.”
In July, the Committee urged the government to set a “swift timetable” to allow companies to create CDC schemes.
Commenting on the government’s response Committee chair, Frank Field, said: “This is a great response and a great news story for everyone, a real win-win situation. I applaud the government for the approach it is taking.
“The historic deal struck between Royal Mail and CWU, combined with the government’s ready willingness to make CDC pensions a reality, mean a huge change is coming to the UK pensions landscape, offering a new and different kind of ‘pension choice’.”
Opperman added that for the moment it would be concentrating on a framework “appropriate” to the needs of Royal Mail and CWU, which “could be a model for other employers”.
Despite this, Hargreaves Lansdown head of policy, Tom McPhail believes the possibility of CDC booming mainstream is still "theoretical" and that many will be disappointed that it will require some formal legislation.
“CDC schemes are quite similar to with-profits funds. This means the controls, scrutiny and member communication have to be absolutely spot on to avoid the risk of members’ expectations being disappointed.
“CDC schemes may one day become part of the UK’s pensions landscape but at the moment it is all a bit theoretical, in the meantime the priorities are to help investors get the best out of the existing defined contribution schemes.”