The government's consultation on rules for collective defined contribution schemes has been received as a welcome step forward, but experts cautioned that initial demand was likely to be low due to restrictive conditions and high costs.
The Pension Schemes Act 2021 provided the legislative framework required to establish and operate CDC schemes, reviving a concept first proposed in 2015.
CDCs are a type of money purchase provision, new to the UK but already established in other countries, which can be established under trust by a single employer or a group of connected employers.
In a CDC scheme contribution rates for employers and employees are set in advance, and members pool investment and longevity risk.
CDC schemes provide income in retirement, though the rate of increase varies and pension reductions are possible in certain circumstances.
In his foreword to the consultation, pensions minister Guy Opperman explained that CDC schemes have long been seen "as a third way between traditional final salary schemes that are guaranteed by employers, and individual defined contribution schemes where investment and longevity risks are born by the individual members.
“One of the benefits of offering CDC benefits is that members do not have to make once-and-done decisions about what to do with their pension pot, as by default a CDC scheme will deliver a pension in-house,” he said.
CDC schemes have greater potential than DC schemes to invest in illiquid assets such as infrastructure, he continued, and “recent studies have shown that a well-designed and well-run CDC scheme can also be resilient to sudden changes in market conditions, such as we have seen during the current pandemic”.
The purpose of the new regulations was to provide confidence in the CDC model, he said, and while for the time being the government’s priority was to “ensure the full framework for single employers and connected multi-employer CDC schemes is in place as soon as we can,” he added the government was “not deaf” to those who “wish us to go further”.
Rollout expected to be limited
Though it constitutes progress, the proposed regulations only allow for the creation of CDC schemes in a limited set of circumstances.
Tim Middleton, director of policy and external affairs at the Pensions Management Institute, said initial demand was likely to be low, “because they're only allowing large single-trust schemes to be established.
“The number of scheme sponsors who would be in a position to do this is small. So there's not going to be a huge take-up outright because the initial audience is very restrictive,” he said.
Postal workers were the first to sign up after Royal Mail and the Communication Workers' Union backed the creation of a CDC scheme in October last year following the 2018 decision to close the Royal Mail defined benefit scheme. Some 141,500 Royal Mail employees are expected to join the new pension fund.
Under the terms of their arrangement, members — auto-enrolled in a similar manner to DB and traditional DC schemes — will contribute 6 per cent of pensionable pay while Royal Mail will contribute 13.6 per cent. Members will also benefit from a lump sum at retirement.
LCP principal Chris Bunford seconded Middleton’s point, noting however, that "whilst these regulations might facilitate the Royal Mail scheme, they are potentially restrictive in terms of the acceptable designs.
“Companies wanting to implement CDC schemes with different features to Royal Mail may find they have to wait for future regulations to give them a manageable pathway,” he added.
“I wouldn't be hugely surprised if we saw some of the larger retail organisations want to have a look at this,” Middleton continued, explaining that CDC schemes are particularly attractive where employers have a large workforce on relatively low incomes.
“But we're not really going to see CDC having any significant impact until the regulations allow it to be expanded into more spheres,” he said.
Chintan Gandhi, partner and head of CDC at Aon, welcomed Opperman’s “commitment to engaging, this autumn or winter, with employers which are looking to join with others to establish multi-employer and/or industry-wide CDC schemes”.
“We believe that this would be a hugely positive step both in establishing CDC but also for providing good pension benefits for workforces up and down the UK. We therefore urge the government to press ahead with drafting its proposed regulations covering multi-employer CDC schemes, and also those provided through commercial master trusts,” he said.
“That is especially so given that two-thirds of those who responded to the RSA CDC Forum’s recent survey said that these approaches to CDC would actually work better for them. Given satisfactory legislation, 25 per cent of the respondents said they would be likely or very likely to set up a CDC scheme within the next five years.”
Authorisation is expensive
The Pensions Regulator will judge applications for CDC authorisation by a strict set of criteria, the consultation explained.
These include: that the persons involved in the scheme are “fit and proper”; that the design of the scheme is sound; and that the scheme is financially sustainable.
Prospective CDC schemes will also require adequate processes for communicating with members, systems that are efficient and that enable the scheme to be run effectively, and an adequate continuity strategy must be in place, the document added.
The consultation also specifies that there will be a single, flat authorisation fee that all CDC schemes must pay, and that this will be higher than the rate set for master trusts.
“The exact amount of the application fee is still to be agreed but following discussions with the regulator, we estimate that the maximum level of the fee will fall between £50,000 and £120,000,” it stated.
The draft regulations contain unique provisions for transfer requests, containing a three-week “cooling off” period that members will be notified of when given their estimate.
It is intended “to provide the member time to consider whether it is in their best interests to transfer out of the scheme and outline the implications of leaving a [CDC] scheme before retirement”, the consultation explained, though members will be able to waive this provision if they provide their written consent.
Benjamin Mercer is a reporter at FTAdviser's sister publication Pensions Expert
