Industry welcomes plans to extend CDC; warns about governance requirements

Industry experts have welcomed the Department for Work and Pensions' (DWP) consultation on legislation to extend collective defined contribution (CDC) provision beyond single or connected schemes, but have expressed concerns over governance requirements.

The draft legislation removes the exclusion of unconnected multi-employer CDC schemes from operating under the existing CDC provisions and sets out what CDC schemes that are whole-life unconnected multi-employer schemes must do to become authorised and to operate effectively under regulatory oversight.

Aon head of collective DC and partner, Chintan Gandhi, said the “long-awaited” consultation, which closes today (19 November), marked a “significant” next step for the development of CDC in the UK.

He said that opening up to multi-employer whole-life CDC schemes, including those provided by master trusts, would meet the needs of employers and the self-employed, arguing that these schemes have the potential to help over 30 million UK workers build up a pension.

In addition to this, Gandhi said multi-employer whole-life CDC schemes, including those delivered by master trusts, would allow investment and longevity risks to be shared across the scheme membership, while, on average, providing better pension outcomes in retirement than could otherwise be available.

Furthermore, he also explained that whole-life CDC could provide employees with an income for life in retirement, which is expected to keep pace with the cost of living, without individuals needing to make “complex” decisions. 

LCP also highlighted the potential benefits of CDC, calling the extension of CDC an "essential" next step for the development of a UK CDC market, which could have a "transformative" impact on members’ retirement options.

Indeed, LCP cited its previous research that suggested CDC could lead to member outcomes up to 50 per cent better than a traditional defined contribution (DC) scheme that annuitises.

LCP also agreed that, following "significant" previous informal engagement with industry, the majority of new actuarial and investment provisions covered by the consultation would "significantly improve" the CDC benefit structures available in a multi-employer setting.

However, some changes may be needed, as Gandhi suggested that members of all whole-life, and, in the future, all decumulation-only, multi-employer CDC schemes deserve the same protection to safeguard their pensions, regardless of the nature of the scheme selected on their behalf.

Given this, he said it was Aon’s “strong” view that all multi-employer CDC schemes should have a scheme proprietor and a specific person responsible for promotion and marketing and in all cases, both must be assessed by The Pensions Regulator (TPR) against the fit and proper person requirements.

He noted that this was an “important” safeguard that would ensure quality and protection for all members of CDC schemes, regardless of whether they are in a non-commercial or not-for-profit multi-employer scheme or commercially-run.

TPT Retirement Solutions also argued it was "crucial" CDC schemes are well regulated and only operated by schemes with sufficient size and expertise to do so.

TPT therefore suggested that it was appropriate for TPR to operate an authorisation regime, which sets high standards for the governance and operation of such schemes, recognising this would help to drive better outcomes and maintain high standards.

Given this, Aon partner and head of UK retirement policy, Mathew Arends, called for the “swift” extension of TPR’s CDC guidance, suggesting that this was of "equal importance" as the regulations.

“It is only with visibility of the entire regulatory regime that providers can judge whether they can introduce whole-life multi-employer CDC schemes to the masses - and in a way that is commercially viable,” Ardens added.

This was not the only area of concern, as LCP raised queries about some of the proposed additional governance requirements for not-for-profit schemes.

In particular, LCP flagged potential challenges in the proposed governance framework, particularly around the role of the scheme proprietor, as well as marketing and communications.

The firm warned that these provisions could deter non-commercial operators from entering the market, if left unamended.

“While the new requirements for scheme proprietors are a positive step for commercial schemes, the current description of the role does not extend well to situations where an existing defined benefit (DB) trust seeks to open a new CDC section," LCP partner, Helen Draper, said.

"This could limit opportunities for these members and employers, and we believe a more flexible approach is needed.”

Adding to this, LCP partner and head of CDC, Steven Taylor, said that while the firm was "very excited" by the extension of CDC to cover whole of life unconnected multi-employer schemes, ensuring schemes have the right level of governance would be "essential".

"However, it’s just as important to strike the right balance so more members and employers can benefit from the advantages CDC offers,” he added.

In addition to this, Isio director, Iain McLellan, called for greater flexibility to be introduced in a number of areas, including the frequency of updating accrual rates/contributions and how annual increases are calculated.

He argued that "sticking too closely" to the existing single-employer CDC scheme rules written for the Royal Mail CDC scheme could limit "innovative" scheme designs and greater options for employers and their staff.



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