DWP faces calls for 'key changes' to CDC regulations

Collective defined contribution (CDC) scheme regulations require key changes if they are to be a success, according to the Association of Consulting Actuaries (ACA).

Responding to the Department for Work and Pensions’ consultation, the ACA called for regulations to allow for CDC scheme designs that incorporate age-related accrual rates and age-related contribution rates (in a single section), stating that it was expected that sponsors would favour this kind of design.

ACA chair, Patrick Bloomfield, commented: “It is essential that CDC scheme designs incorporating age related accrual rates and age-related contribution rates (in a single section) are clearly allowed under the initial regulations. We expect this sort of design to be particularly popular with potential scheme sponsors.

“The draft requirements are extensive and will need significant resources, expertise, and appetite for CDC - this might deter employers without such resources from setting up a CDC scheme.

“Although ‘soundness’ is a key concept in the assessment of such schemes, there is no definition provided and the proposed structure of assessing soundness requires the actuary to consider legal matters and accuracy of member communication, in addition to actuarial issues.”

Additionally, the ACA’s consultation response suggested that the provisions allowing for post-valuation experience should be removed, adding that changes would certainly be required if the provisions were retained.

Meanwhile, responding to the same consultation, The Investment and Savings Alliance (Tisa) welcomed the introduction of the CDC style of arrangement to the UK pension landscape, but cautioned that the industry needed to be aware of the risks associated with the new type of scheme.

Tisa head of retirement, Renny Biggins, said: “In defined benefit pension schemes, the employer bears all the risk, but in the collective money purchase (CMP) model, that risk falls to the employee.

“It is imperative that scheme members are fully aware of both the potential benefits and the risks they are exposed to. The combination of transparency issues, due to complex scheme structure and assumptions, combined with the lack of any guarantees means that the governance of CMP schemes will be crucial to their success or failure for scheme members.

“We have seen both successes and intergenerational issues in European CMP models who benefit from operating these at industry sector level, but it will take time for these schemes to gain traction in the UK.”

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