Government supports the introduction of collective DC pension schemes


Amber Rudd (pictured), secretary of state for work and pensions, has confirmed that primary legislation for the introduction of collective defined contribution (CDC) pension schemes in the UK will be brought forward, to be implemented as soon as parliamentary time allows.

In a consultation response published on Monday 18 March 2019, the Department for Work and Pensions (DWP) announced that proposals for CDC pension schemes to be introduced in the UK will go ahead, after a consultation held in November 2018 received the backing of the pensions industry, insurers and other related bodies.

Rudd 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 [employees] and savers while cutting costs and red tape for British job creators. Any steps that result in better saving returns for [employees] are something to celebrate and I look forward to working with [the] industry to enhance the prospects of millions of [employees].”

CDC pensions, which are currently operated in countries such as Denmark and the Netherlands, aim to provide a regular retirement income by allowing group contributions to be pooled together and invested, to give members a higher final benefit level.

These schemes can also offer better member protection, because the risk is shared, and retirement income is not directly affected by factors such as an employer going into administration.

The government, which worked with postal organisation Royal Mail and trade union the Communication Workers Union (CWU) on the proposals, expects CDC pension schemes to prove popular with employers that want to offer a strong pension provision without the danger of large liabilities.

The consultation response, which was informed by more than 70 contributions to the November inquiry, details that protections will be built into the new system to ensure fairness for both younger and older CDC pension scheme members. Furthermore, trustees of these schemes will be required to outline the potential fluctuations in payouts, which are dependent on investment performance, to members from the start.

Jon Millidge, chief risk and governance officer at Royal Mail, added: “This is very welcome progress. Royal Mail and CWU have been campaigning together to bring about this legislation, building a cross-party alliance of supporters in both Houses of Parliament as well as working with government. We now look ahead to the next stage and, ultimately, delivering the UK’s first CDC pension.”

Terry Pullinger, deputy secretary general, postal at CWU, said: “The response to the consultation on these proposals, and the degree of support from many key players, confirms our belief that the pensions industry is in genuine need of scheme innovation.

“We are very proud and ready to be at the forefront of this historic moment, which we believe will make a major contribution to offering future dignity and security in retirement for decent working people.”

Steve Webb, director of policy at Royal London said: “It is good that the government is moving forward with CDC scheme as part of the pension landscape, but the proposed legislation will be very narrow in scope.

“Even for the Royal Mail, it is likely to be several years before a scheme could be up and running. If other employers want to use a different model, this could need new primary legislation and we would probably be talking about the mid-2020s before further schemes could be in place.

“One of the key features of CDC schemes elsewhere in Europe is the presence of a capital ‘buffer’ to smooth the ups and downs of investments and it is disappointing that the proposed legislation will not allow for this. I strongly suspect that the government has very limited legal resources, as civil servants are being diverted to work on Brexit-related legislation and this is limiting their ability to produce more comprehensive legislation on CDC.”

Simo Eagle, director, retirement at Willis Towers Watson, added: “The government is not just giving a green light to the Royal Mail proposals; it is talking about moving ‘promptly’ to a second stage, where it opens the door for CDC to come in different shapes and be adopted by employers of different sizes. That is essential for CDC to take off; unless it can be offered through a third party such as a master trust, CDC will usually only be an option for large employers.

“Until CDC goes from a theoretical possibility to a lawful option, we won’t know how much demand there might be, but there are good reasons for employers to take a proper look. If an employer can’t take pension risk on its balance sheet but wants to set employees up with an efficient retirement income, albeit a variable one, rather than just an investment pot, CDC will be the way to do that.”