April 13, 2022
The consultation on a new code of practice for the authorisation and supervision of Collective Defined Contribution (CDC) pension schemes ended on 22 March 2022. First Actuarial responded to the consultation. Derek Benstead – who has played an instrumental role in the introduction of CDC in the UK – discusses where we are and where we’re heading.
Introduced in the Pension Schemes Act 2021, CDC pensions are set to become a reality for millions of people in the UK. The Government continues to work towards a ‘go-live’ date of August 2022 for CDC schemes supported by a single employer or a group of connected employers.
It’s taken a while to get the legislation prepared. But delays – with Brexit and then the global pandemic – could only stand in the way for so long. It’s testament to the strength of the CDC idea, and the urgent need for a new type of pension, that it has enjoyed cross-party support since the early days and has withstood the crises of recent years.
CDC reduces volatility by planning for the long term, spreading investment risk across all members. Compared to individual-based Defined Contribution (DC), this offers distinct advantages.
The collective nature of CDC frees schemes up to invest for a good return. It also insulates members against the jeopardy of DC. CDC offers a reliable income for life, rather than a pot of savings that individual members must manage as best they can. And members nearing retirement are protected against sudden drops in equity value without having to switch to bonds and lose out on any last-minute equity growth before they access their pension.
It was the promise of an income for life that attracted the Communication Workers Union (CWU) to the prospect of CDC when Royal Mail proposed replacing its DB pension fund with DC. Supported by First Actuarial, CWU’s negotiations with Royal Mail resulted in a proposal for CDC, marking the start of the journey that eventually led to UK legislation.
The CDC scheme agreed between Royal Mail and the Communication Workers Union will open soon after the August 2022 go-live.
Master trusts and multi-employer schemes
CDC schemes sponsored by a single employer such as Royal Mail are only the start. CDC is a natural fit for master trusts catering for both multiple employers and individual members of the public. It also allows for larger employers that want to start a CDC scheme of their own.
Speaking on 28 March at the Royal Society of Arts (RSA) CDC Forum, Guy Opperman, Minister of State for Pensions said that “we should capitalise on the enthusiasm that is building for extending CDC to other types of pension scheme, such as multi-employer schemes and master trusts. I am keen to move quickly, but we must get this right if it is to work. That is why I am calling on all those who are seeking to deliver the full benefits of CDC to work with us to help make this a reality.”
The possibility that Nest, the scheme set up by the government, could be developed to offer CDC was also discussed at the RSA CDC Forum. This takes me all the way back to 1998, when I proposed a national CDC scheme to the new Labour government’s stakeholder pension consultation.
Two and a half decades later, an employer switching from DB to individual DC provision need not write off the idea of moving later to CDC. Employees with individual DC pots will then be able to transfer them to a CDC scheme and convert them into a CDC pension. A CDC pension is likely to be higher than a pension annuity purchased with a DC pot at retirement.
Other recent and upcoming CDC developments
The Pensions Regulator’s (TPR) consultation on its draft code of practice for authorising and supervising CDC schemes closed recently. With a strong focus on quality of member communications, the code takes a detailed look at the administrative, governance and IT systems that will have to be operational before a CDC scheme application can be considered.
Meanwhile, the Minister of State for Pensions is planning a DWP (Department for Work and Pensions) consultation later this year on the design principles for CDC schemes catering for both multiple employers and individuals.
What should we make of these recent developments?
On the positive side, both the CDC regulations and TPR’s code of practice are written to cater for CDC master trusts. Very few changes will be needed to the legislation and regulations to accommodate master trust CDC. Hopefully, then, it won’t be long before master trust CDC is facilitated, and not much longer after that before the first CDC master trusts come on to the market.
On the negative side, the code is arguably over-detailed. Many in the industry have commented that it is unnecessarily strict and could put the growth of CDC at risk. I’m hoping that the regulations and the code can be applied with a lighter touch where there are no competitive pressures or vulnerable customers.
Towards a brighter future with CDC
Ultimately, CDC will only become mainstream when an employer can join a CDC master trust as easily as they can join a master trust providing individual DC accounts, and when individuals can join a CDC scheme instead of a personal pension.
To help achieve that, First Actuarial will undoubtedly engage with DWP on the development of CDC. We have plenty of ideas on how CDC could be run, for both multiple employers and individuals.
As the Minister of State for Pensions said at the CDC Forum: “CDC schemes have the potential to transform the UK pensions landscape and deliver better retirement outcomes for millions of pension savers.”
It’s great to see that level of political enthusiasm, particularly in such challenging times. Let’s hope that we see master trust CDC developed within this term of parliament.