Proposed CDC legislation ‘narrow in scope’ – Steve Webb

Royal London director of policy, Steve Webb, has voiced his concern that the government’s proposed legislation for collective defined contribution schemes (CDC) was “very narrow in scope”.

Although he was “pleased that they are moving forward with the concept”, he highlighted two areas of major concern.

Webb specified the decision to legislate only for a single employer or associated employer model, because “the trouble is that even this will take years to go from primary legislation, secondary legislation into implementation even for Royal Mail”.

He also detailed that the decision “not to legislate for models with a ‘capital buffer’ which could help to smooth the ups and downs of investments” was “quite restrictive”.

Other industry members have issued a mixed response to the government’s announcement on the introduction CDC pension schemes.

Although some experts believed that CDC schemes would be positive addition to the UK pensions landscape, others warned that they are complex and must be carefully communicated to members, and that they may be incompatible with pension freedoms.

Most agreed, however, that if CDC schemes were to be successful, it would take time and innovation to establish the appropriate legislation.

Commenting on the announcement, AJ Bell senior analyst, Tom Selby said: “CDC schemes have the potential to be a positive new addition to the UK pensions landscape.

“But anyone expecting an immediate retirement revolution or a massive ‘pensions boost’ resulting from the design of such schemes probably needs to reassess their expectations.”

Willis Towers Watson Retirement business director, Simon Eagle added: “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.”

CDC legislation and experimentation has been spearheaded by Royal Mail and its union, Communication Workers Union (CWU), which issued an optimistic response to the announcement.

CWU deputy general secretary Terry Pullinger said: “The pensions industry desperately needs innovation if we are to enable people to retire with dignity and security.

“The CWU is proud, along with Royal Mail, of being at the forefront of such innovation and will be delighted to prove that CDC options will prove to be a watershed moment in pension provision and benefit working people way beyond our own membership.”

However, some industry experts were not so convinced. Aegon pensions director, Steven Cameron commented: “Despite our parent company being based in the Netherlands, we are not convinced ‘going Dutch’ with pensions will be right more broadly within the UK.

“There are huge challenges in automatically enrolling individuals into a scheme with such complex design features.

“CDC won’t offer members a choice of investment funds and importantly may not provide access to the pension freedoms which have proved highly popular in allowing people to draw down from their pension flexibly.”

Aon head of UK retirement policy, Matthew Arends added: “One thing that surprised us is the lack of additional controls over the setting of the actuarial assumptions to value the CDC target benefits – the DWP indicates that the Institute of Actuaries’ existing Work Review requirements will apply.

“This could mean that there will be no external scrutiny of actuarial assumptions for CDC schemes until they are published after the actuarial valuation is complete. As the actuarial assumptions – and, in particular, the discount rate – will directly determine the pace of pay outs to members, we were expecting that more explicit, external review and ratification of the assumption setting would be required.”

Finally, Selby warned that CDC legislation could be overshadowed by the ongoing Brexit negotiations, meaning that the government could only commit to implementing the schemes “as soon as parliamentary time allowed.

He concluded: “While the DWP is clearly champing at the bit to get CDC legislation in place, Brexit remains the only show in town in Westminster at the moment. We know CDC is coming but we have at this stage no idea when.”

“Although there is obvious enthusiasm for expanding the CDC design from DWP – potentially through the creation of multi-employer schemes - that is not the focus of policymakers at this moment in time.”

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