Defined Contribution  

Master trusts eye new pensions for decumulation

Master trusts eye new pensions for decumulation

The government will consider allowing master trusts to offer collective defined contribution schemes for decumulation purposes.

Julian Barker, defined benefit team leader at the department for Work and Pensions, said at an event in the house of commons this week (October 16) that master trust providers have shown interest in offering the schemes to their members.

He said: “The funds in master trusts are growing, and the members are ageing, and they are very conscious that when these members come to them with funds and say ‘I want to retire, what do I do with this money,’ the options they can give people at the moment are very limited - go to an annuity provider, go to a drawdown provider, or just take the cash.

“And the master trusts don't really want to sell themselves as a saving vehicle, they want to sell themselves as a pension.

“One of the options that they would like to be able to offer is to move the funds into this collective fund, and it will aim to pay a pension when the member gets to 65 or 67. That is something that master trusts are seeing that in five, 10 years’ time they want to be able 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) included 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 also pointed out that master trusts would be able to take on new members in decumulation by offering a CDC option.

He added: “We see there is quite a lot of interest in that market developing, and it is not just from the master trusts, [we] also heard it from the unions, which are very strongly behind it.”

He explained that at the moment the rules included in the Pension Schemes Bill don’t provide for this precisely, as “it is aimed very much at trying to keep things simple, so it works for single employers like Royal Mail”.

“But we have powers in the bill to adapt the legislation later, via secondary legislation, to do these things,” he added.

Nathan Long, senior analyst at Hargreaves Lansdown, said: "It’s an obvious next step to explore using master trusts to provide pooled retirement solutions at a time when low interests are distorting retirement behaviour. The question remains whether retirees actually have the appetite to tie money up in a ‘retirement CDC’ arrangement.