Julian Barker, defined benefit team leader at the department for Work and Pensions, said at an event in the house of commons this morning (October 16) the new schemes will allow individuals free access to the pension freedoms.
The government's aim to introduce a similar £30,000 advice threshold to that which exists for DB transfers will only come into force some time in the future, he said.
He said: “The rights in a CDC scheme are very different to what they are in a DB scheme, it is too early to say what sort of advice people would need.
“They need certain information, and there need to be safeguards put in place, but the difficulty at the moment is if we were to include an advice requirement, there isn't actually anyone who can give that advice.”
Another issue is that it will take some years for members to build up the funds to be able to surpass the £30,000 threshold, he noted.
Mr Barker said: “What we think it's best is to have safeguards around transfers which are more to do with making sure the transfers are legitimate, rather than whether they are suitable, and use the time while the funds are building up and the market develops to develop what we need to do.”
CDC schemes differ from DB pensions in the sense they do not guarantee certain incomes in retirement. Instead, CDC 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.
Part of the Pension Schemes Bill announced on Monday (October 14) includes provisions to create CDC schemes, as the document provides a framework for the establishment, operation and regulation of this type of pension fund.
Royal Mail is the first company looking to set up one of these plans, after reaching an agreement with the Communication Workers Union and gaining approval from workers in April 2018.
Mr Barker noted the DWP is “very conscious that as the market develops, as the funds grow in size, and obviously as expertise and understanding of these new schemes develops, then it will probably make sense to have further safeguards around advice.”
He said the Financial Conduct Authority will need to create new rules for financial advice on CDCs, but that will come in time.
He said: “We've been very fortunate that we have had probably more time to develop this legislation than it is usually the case, so the bill is very well developed, and there are very few areas where we say we need to think about that later.”
Alan Chan, director and chartered financial planner at IFS Wealth & Pensions, agrees with the government's approach to wait and see how the market develops.
He said: "[CDCs] are a bit of a halfway house between a DB and DC scheme in that there are no guaranteed benefits but at the same time the individual has no pot of their own so is not responsible for investment decisions.
"As there are no safeguarded benefits on the face of it there shouldn’t be a need to take advice from a pension transfer specialist to transfer out, which is the same treatment as DC pensions."
maria.espadinha@ft.com
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