The government has failed to confirm whether it will introduce an advice requirement for transfers out of collective defined contribution schemes similar to that in defined benefit schemes, as it rubber-stamped the new pensions.
CDC schemes differ from DB pensions in the sense that they do not guarantee certain incomes in retirement. Instead, they have a target amount they will pay out, based on a long term, mixed risk investment plan.
The schemes also differ from the traditional defined contribution plans in that they do not produce individual pension pots. Instead they invest savings in a larger collective pot, which provides an income to individuals during their retirement.
The schemes, first proposed by Royal Mail and the Communication Workers Union, received approval from the government this morning (March 18) but there is still uncertainty about the advice rules they may become subject to.
It is a legal requirement for defined benefit schemes to ensure members take independent advice before transferring out with a cash equivalent value upwards of £30,000.
And according to the consultation report, several respondents have called for a similar legal requirement for CDC schemes.
In its response the government detailed: "We can see that there are strong arguments for requiring members of a CDC scheme to take advice before transferring out.
"However, we are also conscious that suitable financial advice may be very difficult to find before CDC schemes become fully established in the UK pension landscape."
It added: "We will continue to review developments in this area as we develop the legislation for CDC. We intend that this will include powers to make appropriate provision in secondary legislation to protect members at the point of transfer."
The new schemes are expected to appeal to companies who want to offer pensions provisions to employees without having to hang on to enormous pension liabilities.
The proposals went to consultation in November 2018 and the report published today confirmed primary legislation will be brought forward to introduce CDCs.
CDC scheme offers members regular payouts that aren’t affected should an employer go into administration.
The schemes provide a regular retirement income by allowing group contributions to be pooled together and invested to give members of the scheme a higher final benefit level.
For members this shared risk means the schemes offer better protections over the long term, the government stated.
Amber Rudd, work and pensions secretary, said: "Introducing a completely new pension scheme to the market is yet another revolutionary reform in this Government’s quest to transform the retirement saving culture in this country.
"These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators."
Ms Rudd added the proposed CDC scheme was similar to what is currently in place in Denmark and the Netherlands.
She said: "Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industry to enhance the prospects of millions of workers."
According to the consultation response, protections will be built into the system to ensure fairness for both younger and older CDC pension scheme members and trustees will be required to spell out the potential for fluctuations in pay-outs – depending on investment performance – to members at the outset.
During the consultation, a pension advisory warned "transfers out could create a financial skew in scheme funding that would most likely require the actuary to make downward adjustments to transfer values".
Steven Cameron, pension director at Aegon, said the industry was divided on the "relative merits of CDC".
He said: "Supporters point to them offering greater certainty to individuals compared to defined contribution with the potential to pool investments and reduce charges. Critics point to the complexity of explaining the scheme’s benefits to members and their incompatibility with pension freedoms.
"Individuals are told what their ‘target benefit’ is but this is not guaranteed and it is likely that actual benefits will be different from the initial target, making planning difficult.
"Most worryingly, there is a very significant risk that monthly pension income once in payment could fall. There is also the potential for one generation of members to subsidise another."
Mr Cameron added that, given Aegon’s parent company was Netherlands-based, it is "not convinced ‘going Dutch’ with pensions will be right more broadly within the UK".
He said: "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.
"While we believe individuals may be allowed to transfer out to access freedoms, the terms for doing so are far from clear."
Kevin Wesbroom, senior partner at Aon, said: "Overall, it is very pleasing to see so many responses to the DWP that were supportive of CDC, and that many were advocating multi-employer and decumulation-only CDC solutions. These are both things that we continue to support, since they address gaps in the current pensions architecture.
"Two questions that will be answered in separate consultations will be how the taxation of CDC benefits will be managed, and how CDC schemes will qualify for auto-enrolment.
"Both are key aspects of how CDC schemes will operate and we are confident that sensible outcomes will be offered."
The Department for Work and Pensions was working with Royal Mail on introducing a collective defined contribution scheme after the postal company closed its defined benefit pension fund to future accrual last March.
Fiona Tait, technical director at Intelligent Pensions, said: "Innovation in pension schemes is always to be welcomed and certainly in the Royal Mail scenario it would seem to be a well thought out solution to their specific circumstances, where benefits were originally built up within a public sector arrangement which is not sustainable under private ownership.
"I would caution however that the potential for higher benefits than under a DC arrangement is absolutely not a guarantee and member expectations must be very carefully managed if employers are to avoid their intentions being treated as actual liabilities in future.
"Rhetoric already suggests that 'millions of people' will be better off and while this could well be the case it is not a certainty."
Ms Tait pointed to particular difficulties for members looking to transfer their benefits out of the scheme.
She said: "Members of CDC arrangements will not have their own 'pot' within the scheme since benefits are pooled and instead will be given notional units within the collective fund, which may be valued and paid out at any time.
"This value will only be available on leaving the scheme, it does not belong to the member and would not be due to be paid in the event of the member’s death.
"Advisers would still have to compare the value of benefits they might expect to get under the CDC arrangement with realistically projected benefits from the receiving arrangement however it would differ from a final salary transfer in that neither arrangement is guaranteed and more work might need to be done regarding the probability of each outcome being achieved."
