Work and Pensions Committee supports legislation for collective defined contribution schemes

CDC pensions

The Work and Pensions Committee has urged the government to legislate to enable the creation of collective defined contribution (CDC) pension schemes in the UK.

The committee has published the recommendations following its inquiry into the possibility of introducing CDC pension schemes into the UK pensions market. The inquiry ran between November 2017 and January 2018, and explored whether CDC arrangements could benefit UK savers, and whether this type of scheme would work cohesively alongside the existing pension freedoms. The inquiry also investigated whether underfunded defined benefit (DB) pension schemes could be replaced by CDC schemes, and how potential CDC arrangements could be legislated for and regulated.

The inquiry and recommendations are the result of postal organisation Royal Mail reaching an agreement with the Communication Workers Union (CWU) to implement a CDC pension scheme as an alternative to its DB arrangement, which closed to future accrual from 31 March 2018.

Terry Pullinger, deputy general secretary at the CWU, said: “We are delighted the Select Committee has come out in support of our CDC scheme and has recommended the government introduce the legal changes we need to provide CWU members with a decent wage and security in retirement. Our scheme will be the first of its kind in this country and will provide an exciting and important innovation in pension provision that offers an alternative and not a replacement for DC and DB provision. It is certainly the solution for our members and we will continue to work with all concerned to secure its introduction ASAP.”

CDC pension schemes, which are common in countries such as the Netherlands, Denmark and Canada, and are also known as defined ambition schemes, are not currently offered in the UK.

These schemes have a target amount that they will pay out, based on a long-term, mixed-risk investment plan. The aim is to provide an adequate level of index-linked pension for life, but it does not have a contractual guarantee. CDC pension schemes can redefine the benefits they offer subject to circumstances; for example, adverse economic conditions.

CDC pensions also do not produce an individual pension pot, but instead invest members’ savings into a larger collective pot which then provides a retirement income. This can influence decision making around pension freedoms, and alter the pension’s risk profile.

The Work and Pensions Committee has suggested that the government use its powers under section 32 of the Pensions Act 2011 to amend the statutory definition of money purchase benefits to incorporate collective benefits. This would reassure employers that they will not subsequently be held liable for funding scheme deficits.

The committee further stated that CDC pension schemes should be governed by a board of trustees, and be both authorised and supervised by The Pensions Regulator (TPR). In addition, the committee recommends that CDC schemes should be required to publish benefit calculation rules, as well as its funding position and strategy, at least annually.

In setting up the UK’s first CDC pension scheme, the committee proposes that the government should consult on benefit adjustment and risk sharing policies. This should include: how to achieve inter-generational fairness within CDC schemes; the regime for transfers out of CDC schemes, such as whether they should be permitted once pensions are in payment and whether members transferring out should have to take financial advice; and whether CDC scheme trustees should be required to have a specific qualification.

The committee found that CDC pension schemes give organisations the option of providing a good workplace pension to staff without the risk of large long-term pension liabilities. CDC schemes can also enable employees to receive a regular income that is managed collectively, which may even be more generous than a typical defined contribution (DC) arrangement. Offering CDC schemes aligns with pension freedoms and promoting retirement savings, according to the committee.

The committee supports the government’s indication that it will enable CDC schemes in a way that allows other organisations to follow suit, and it recommends that the government lay out a swift timetable for this process.

Rt Hon Frank Field MP, chair of the Committee, said: “The idea of a ‘new Beveridge’ has been overused and under-delivered during most of the welfare state’s life. But the report published by the Select Committee offers that opportunity for pensions; how to combine decades of individual pension ownership and provision with collective security. The report centres on collective defined contribution schemes specifically in relation to the breakthrough at Royal Mail.”

Jon Millidge, chief risk and governance officer at Royal Mail, added: “We are pleased that the committee has expressed its support for CDC and recommends ‘the Government should set out a swift timetable for enacting CDC schemes in the UK’.

“As the provider of around one in every 190 jobs in the UK, Royal Mail is committed to delivering the best possible pension arrangements for our people. With the Communication Workers Union (CWU), we have committed in principle to the future introduction of a CDC scheme for all Royal Mail employees, subject to the necessary legislation.

“Given the support from this influential committee, and the progress we have made with government in recent months, we hope the government will introduce the legislation required to enable CDC pensions at the earliest opportunity.  We want to be able to offer a CDC scheme to our 141,000 strong workforce as soon as possible.”

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Nathan Long, senior pension analyst at Hargreaves Lansdown, added: “The noises coming from the [Department for Work and Pensions] suggest they are already supportive of Royal Mail’s efforts to improve pension provision for their staff. Both Royal Mail and the [CWU] see merit in collective pensions for the firm’s employees, but this shouldn’t be confused with this pension blueprint holding universal appeal. CDC pensions offer a target benefit without any guarantee which could be confusing for members and potentially damaging for the pension industry if the targets are not met.

“There are uncomfortable similarities with profit pensions of the 80s and 90s which often left policy holders disappointed. Pensions are currently riding high because of the success of the government’s auto-enrolment programme; the last thing we want is anything to damage this. The Work and Pension Select Committee raises several important challenges, such as how to advise on these types of pension, how transfer values should be calculated and if transfers out should be allowed in retirement. These types of pensions provide a retirement income, but without flexibility. Today’s retire-as-you-go generation demand more flexibility from their pension to match their modern working patterns, meaning many could turn their back on CDC pensions when retirement comes.”