Govt gives go-ahead for CDC schemes

The government has announced that it will be pushing ahead with the introduction of collective defined contribution (CDC) pension schemes to improve the retirement outcomes for both employees and employers.

Pensions Minister Guy Oppermen said today (18 March) that the plans will pool savers’ risks and give them more stability in retirement, in a move which could boost savings by up to 7 per cent.

The announcement follows a consultation by the government, in which it said that a “vast majority of the responses were “supportive of the proposals”.

Opperman said: “CDC schemes will provide employers with new options for managing their pension obligations, with benefits for workers and employers alike.

“As I said in the forward to the original consultation, CDC schemes are not a catch-all solution to concerns around retirement outcomes. But I am confident that well designed and run CDC schemes can offer advantages for some employers and employees in the UK.”

Opperman added that it will facilitate CDC provision “as soon as parliamentary time allows”. There is expected to be some follow up questions in the House of Commons this afternoon.

The initiative has been spearheaded by the Royal Mail, backed by the Communication Workers Union (CWU), after it drew up the plans for its 140,000 employees, based on the “world leading” pension systems in the Netherlands and Denmark.

It added that once it has ironed out any issues with the Royal Mail trial, it will look to expand CDCs to master trusts and multi-employer pension schemes.

Last month, Opperman said that the government, Royal Mail and CWU had been working hard behind the scenes to make CDC a reality for the UK pensions landscape.

CDC is an issue that has divided opinion in the pensions industry over the past years, with many believing there is likely to be both “winners and losers” to the new proposals.

According to the government, the biggest challenge for schemes regarding the implementation of CDC is the communication of the “variable nature of the pension income”.

In a CDC scheme, contributions are pooled and at retirement individuals will receive a regular income from the fund. Their income is not guaranteed and could fluctuate depending on the fund’s performance.

Willis Towers Watson director and CDC adviser to Royal Mail, Simon Eagle, said: “The government is not just giving a green light to the Royal Mail proposals – it is talking about moving ‘promptly’ to a second stage, where it opens the door for CDC to come in different shapes and be adopted by employers of different sizes.

“That is essential for CDC to take off: unless it can be offered through a third party such as a Master Trust, CDC will usually only be an option for large employers.”
 
Also commenting on the announcement, Aon senior partner, Kevin Westbroom, said: “The consultation makes it clear – as we have argued – that clear and accurate communication of CDC benefits to actual and prospective members will be a real challenge.

“The pensions industry is regularly accused of failing to communicate pensions effectively – so the communication of CDC schemes needs to be an exemplar for the whole industry.”

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