Earlier today, the Coalition government used the last Queen’s speech of its tenure prior to next year’s general election to confirm that employees will be able to pay into CDC pension funds.
Under the CDC model, contributions are not retained in an individual fund for each member but are pooled. When a member retires the income is paid from the asset pool rather than through the selection of an individual retirement income product.
Ministers believe that pooling money in this way will help increase the retirement incomes of some workers up to 30 per cent.
These funds have come under fire for having similar traits to with-profit funds and due to accusations that they leave savers “at the mercy” of market and actuaries’ forecasts.
Stephen Bowles, Schroders’ head of defined contribution, warned that the introduction of these new rules may be a “bridge too far” for employers and the pensions industry.
He said: “It comes on the back of a wave of pensions legislation in recent years, including auto enrolment, the liberalisation of post-retirement options in the Budget and the capping of charges.
“These fundamental changes are already stretching all those involved in providing workplace pensions. The industry may now struggle to effectively implement CDC, which is a completely new concept for the UK.”
Indeed, proposals for the new money purchase model, based largely on schemes popular in the Netherlands, is an entirely new concept in the UK.
Alan Higham, head of retirement insight at Fidelity Worldwide Investment, said: “Fidelity is concerned that the sheer volume of new pension legislation – albeit well intentioned – is having a detrimental impact on consumers.
“We would like to call for a pause within parliament from issuing more significant pension changes whilst we digest what’s on our plate now. Customers we speak to are totally confused by their choices which leads to paralysis of action which benefits few.
“Industry is inundated with demands from regulators and politicians whilst being asked to innovate.”
He believes today’s announcement of a third Pensions Bill to legislate CDC is “badly timed” and will “further dilute resources that need to be applied to help people retiring today”.
Jonathan Parker, head of investment proposition at Barclays Corporate and Employer Solutions, agreed, also warning that there is a “very real danger” that employers and individuals are becoming overwhelmed with yet another announcement of major reforms.
He said: “These reforms should not derail the government’s positive efforts around auto-enrolment. With a huge number of SMEs still to stage, although signs are encouraging, AE is relatively untested as yet and the continued rapid pace of reform does not allow sufficient time for people and employers to fully understand their options.
“There needs to be a period of reflection and more education, otherwise we risk inertia.”
Mark Stopard, head of product development at Partnership, warned that the Dutch model cannot simply be copied as the UK market “poses different challenges”.
He said: “One possible solution is to look at ways in which we can adapt the CDC model by using areas of expertise where the UK is arguably a world leader such as individual underwriting of longevity risk that underpins the current enhanced annuity products.
“As usual, the devil will be in the detail and we await further information as to how these product might operate in the UK market.”
Dominic Grinstead, managing director at MetLife UK, adds the three elements of reform, the flat rate pension, auto-enrolment and creating freedom in retirement income planning, “are all welcome to effectively deal with the new reality of people living longer”.
He said: “This will encourage people to save and create an environment of responsibility towards saving for retirement. It is crucial that the momentum created by the Budget is maintained.
“The goal of the new CDC schemes must be to reinforce the pensions savings culture in the workplace by establishing a fair, flexible and straightforward means of saving for a comfortable retirement.
“If this opportunity is missed it will damage saver confidence in the new pensions regime.”
