40.There are two mutually-exclusive types of private pension benefits in existing UK law:
Under this binary system, a sponsoring employer must bear the funding risk of providing collective benefits. CDC schemes are therefore not currently possible in UK law.
41.The Pension Schemes Act 2015 was intended to promote greater innovation in pension provision, including to “enable, encourage and foster risk-sharing models”. Part 1 of the 2015 Act breaks the existing DB-DC dichotomy by introducing a new third category of risk-bearing arrangement, “shared risk” (sometimes known as “defined ambition”). This allows for risk to be shared between members, sponsors and potentially third parties such as insurance companies. Part 2 of the Act allows risk-pooling between individual scheme members through the payment of “collective benefits”, the value of which can vary. This legislation, which was passed with cross-party support, could incorporate CDC pensions. Sandeep Maudgil, a partner specialising in pensions at law firm Slaughter and May, described the 2015 Act as a “seriously well thought through piece of work”.
42.Though the 2015 Act appears to offer a ready-made solution for CDC, it has not yet been implemented. The provisions that would enable CDC are embedded in wider changes to the legislative framework for all private pensions. Commencement of the 2015 Act would therefore depend on a “wholesale rewriting of pensions legislation”, through regulations to support all existing and new forms of pension provision envisaged by it. In October 2015, the Government announced that the implementation of the 2015 Act would be postponed indefinitely to enable Government and the pensions industry to focus on other pension reforms. This remains the Government’s position. The DWP said that to implement the 2015 Act now would be complex, time-consuming and disruptive to tens of thousands of other pension schemes. This would be an “unacceptable” price for enabling CDC schemes, especially given the “uncertain demand” for them.
43.An alternative to implementing the 2015 Act to enable CDC schemes is to redefine money purchase benefits. This is possible by regulations under section 32 of the Pensions Act 2011. Philip Bennett said that the definition could be changed to accommodate schemes where target obligations to members are kept aligned with scheme assets through adjustments to benefits. He said this redefinition could be as simple as adding that members’ money purchase benefits can derive indirectly, as well as directly, from assets built up. This was, he said, “substantially more straightforward than seeking to implement the Pension Schemes Act 2015 provisions”. The RSA agreed that the Government could quickly enable CDC schemes by introducing regulations under the current framework.
44.Changing the definition of money purchase benefits may have the added benefit of reassuring employers about CDC. The Government has confirmed that it views a CDC scheme as one in which risks are shared between members but not with other parties such as the employer. However, employers may nevertheless be worried about the prospect of “legislative creep” whereby such a commitment is imposed on them in future if pensions fall short of targets. The Society of Pension Professionals warned that legislation had converted DB pensions from “good faith” arrangements into hard guarantees and cautioned against similar “gold-plating” of CDC pensions. The Institute and Faculty of Actuaries told us that giving employers reassurance that they will not face balance sheet liabilities was necessary to create early “buy-in” for CDC schemes. Philip Bennett said that classifying CDC pensions “unambiguously” as money purchase benefits under the 2011 Act would give employers the assurance they need.
45.While redefining money purchase benefits is relatively straightforward, establishing the detailed regulatory framework for CDC schemes will require substantial supporting secondary legislation. Part 2 of the 2015 Act has 28 sections which provide a ready-made guide to the technical aspects of collective schemes that would need to be addressed in regulations. The DWP grouped these aspects into ten key themes:
a)the parameters within which schemes would set target benefit levels, and how those benefits are accrued;
b)contributions to the scheme;
e)policies for dealing with under- and over-funding;
f)purposes for which payments can be made out of the collective fund, for example to pay levies;
g)transfers into and out of a collective fund;
h)winding up of the scheme;
i)duties of trustees or managers, for example information, reporting and professional advice requirements; and
The DWP estimated that “regulations this complicated and technical would require up to two years to develop, consult on and implement”. The Minister said he was conscious that “Royal Mail and CWU are keen to progress this” but that it was important to take time to consult as “there is always a law of unintended consequences by Government action”.
46.While commencing the Pension Schemes Act 2015 would enable the creation of CDCs as part of a coherent and redesigned pensions landscape, it would be disruptive. Action under the 2015 Act is not necessary for CDC schemes to be introduced. We recommend the Government use its existing powers under section 32 of the Pensions Act 2011 to amend the statutory definition of money purchase benefits to incorporate collective benefits. This would have the added benefit of reassuring employers that they will not subsequently be held liable for funding scheme deficits. We further recommend the Government consult on technical regulations addressing each of the areas identified in Part 2 of the 2015 Act, to a swift timetable set out in response to this report. In the remainder of this chapter, we consider some key priorities for the CDC regulations.
47.Each CDC scheme will need rules governing the accrual and payment of benefits, including how benefits are adjusted in response to changes in the funding position. Given the fundamental importance of these rules, numerous respondents told us that there should be substantial prescription in the regulations, covering factors including:
Willis Towers Watson, a risk management consultancy, told us that discretion in setting these rules was desirable to suit individual schemes and circumstances. The ABI cautioned that “too many options” would result in “complexity for members and significant communication challenges.” Attempts to consolidate smaller DB schemes to achieve economies of scale have been complicated by the enormous inconsistency between scheme rules.
48.An important consequence of scheme rules will be how risk is shared between generations. There is a danger that trustees could seek to protect pensions in payment at the expense of sustainable long-term funding, to the detriment of younger scheme members. At the extremes, we heard concerns that CDC schemes would rely on successive generations of new members to support the entitlements of older members, an arrangement “suspiciously like a Ponzi scheme”. Any perception that CDC unfairly transfers resources between generations risks undermining the collective basis of CDC and the participation of younger workers. This issue has become central to the pensions debate in the Netherlands. While some Dutch schemes chose to cut pensions in payment in response to post-recession funding difficulties—to the consternation of the pensioners affected—other schemes chose not to and were criticised just as much for transferring risk to the younger members. The Dutch government has acknowledged that CDC schemes have rewarded age groups differently for the same contributions and is consequently examining options for reform of its pension system.
49.We were told, however, that intergenerational transfers are not an inherent feature of CDC and that difficulties experienced by Dutch schemes can be learned from. Options include linking accrual rates to age (with a higher accrual rate for younger members), containing risk-sharing within distinct age cohorts, or periodically adjusting the investment strategy to reflect changes in scheme demography. Furthermore, intergenerational fairness in pensions is not an issue restricted to CDC. The UK private pension landscape already exhibits major intergenerational disparity—between older generations of private sector employees for whom generous DB pension provision is common and younger generations who are largely restricted to DC schemes. Risk and reward could be more fairly shared between generations through the introduction of well-designed CDC schemes.
50.The Dutch experience has demonstrated that intergenerational fairness is a major issue for CDC schemes. Adoption of CDC in the short term, and the avoidance of difficulties in the long term, will depend in part on the extent to which people perceive that they will be fairly rewarded for the contributions they make at every stage of their working life. We recommend the Government consult on achieving fair intergenerational risk sharing through CDC scheme design, learning from the experience in the Netherlands. This should be part of a wider consultation on benefit adjustment and risk sharing policies in CDC schemes.
51.We were told that it would be perfectly possible for an individual member of a CDC scheme to receive a cash-equivalent transfer value (CETV) of their entitlements before retirement, calculated as a proportionate share of the collective assets, without causing detriment to those remaining in the scheme. Views differ however as to whether members should be able to cash out of a CDC scheme when they have already entered the payment phase. Henry Tapper, a pensions expert, told us that his vision for CDC was “one where even if the target pension is in payment, people still have the right to take their money away”. By contrast, Philip Bennett told us that allowing such transfers would compromise the longevity pooling which is central to the benefit offered by the CDC model. This is because members who have short life expectancies, and therefore lower pension cost to the scheme, would have the greatest incentives to leave the scheme.
52.DB scheme members can choose to take a CETV before they begin drawing their pension, providing they have taken financial advice first. In our report on the British Steel Pension Scheme, we highlighted concerns that members of that scheme were being encouraged to take decisions against their best interest by dubious advisers incentivised by contingent fee arrangements. A decision to transfer out of CDC would be of similar complexity to the decision to transfer out of DB. This has led some to suggest that transfers out of CDC into individual DC could be subject to a similar advice requirement. However, CDCs do not promise pensions of a set value and many of CDC’s proponents envisage the freedom to transfer in during the accumulation phase, which would mean a transfer out would not be irreversible. Given the novelty of the CDC proposition, more work is needed to determine whether extra protection is warranted for members considering transfers out of CDC.
53.There is a strong pension freedoms case for members of CDC schemes who are still saving for their pension to be able to transfer out into alternative pension arrangements. The case for allowing transfers out in the decumulation phase is far less clear-cut, as this could erode the longevity pooling benefits of this model. Regardless of the point at which members choose to transfer out, the choice to do so is a major one. There is a strong case for members to be obliged to take financial advice on a transfer on a basis that does not involve a contingent fee.
55.Communication is a major challenge for the entire pensions industry. Given the novelty and potential complexity of CDC, there was a broad consensus from witnesses that transparency and effective communications were vital. The ABI said that mistaking target pension rates as guarantees, and therefore not understanding that members bore funding risk, was “arguably the greatest risk of CDC”. Unite said that clear communications were particularly important when benefits are adjusted below target levels, to provide assurance that decisions were justified and equitable.
56.Clear and effective communication will be vital to the success of CDC. Members need to understand that CDC schemes offer a pension target, not a pension promise. We recommend that all CDC schemes be required to publish their rules for calculating and distributing member benefits in a standardised format, provide data for the pensions dashboard—the planned new digital platform intended to show all an individual’s pension entitlements in one place—and to report publicly their funding position and strategy at least annually.
57.CDC entails complex and potentially contentious decisions about benefit adjustments, risk-sharing and investment strategy, meaning that careful consideration needs to be given to the appropriate governance model for such schemes. The UK has two governance regimes for pension schemes:
58.We heard that either approach could be used to operate a CDC scheme. There was, however, a strong feeling among respondents that, given the stewardship of such schemes will involve discretionary judgement in assessing the funding outlook and balancing the competing interests of members, the trust-based approach was appropriate for CDC. Royal Mail envisaged that its own CDC scheme will operate under similar trust-based governance (and TPR regulation) as DB schemes.
59.The trustee role is crucial but trustee readiness is an area of significant concern. DB trustees vary greatly in their capability and rely heavily on advice from external consultants. In the case of a new and untested pensions model such as CDC, the requisite experience and expertise will initially be in short supply. Kevin Wesbroom told us that “CDCs should have the highest quality of governance available.” Dr Alwin Oerlemans, of APG, told us that trustees in the Netherlands have to be approved by the regulator.
60.The CDC model entails complex and sensitive decisions about benefits. There is therefore a strong argument that all CDC schemes should be subject to fiduciary governance by a board of trustees answerable to their members. Given the new and challenging demands that CDC places on trustees and their advisers there is a case for more stringent qualification requirements than currently exist. We recommend that the Government consult on whether a specific qualification should be required for trustees of CDC schemes and their advisers. We further recommend that the Government consult on a framework to identify trustees who exemplify the very best practice in the emergent field of CDC pensions and to appoint these to an advisory panel of ‘super-trustees’ tasked with playing a capacity-building and trouble-shooting role among the broader trustee community.
61.The adoption of a trust-based model would place CDC schemes firmly within the remit of TPR, which already regulates DB pension schemes and multi-employer DC schemes (known as master trusts). Aon told us that it would expect TPR to be able to intervene in CDC schemes if plans set by trustees were inappropriate. Redington, an investment consultant to pension funds, told us that TPR should have “veto powers over target and pension in payment policies”. The Minister said that the Government was considering an authorisation regime for CDC schemes as part of discussions around Royal Mail’s plans. We were told that the regulatory framework for DC master trusts set out in the Pension Schemes Act 2017, which requires schemes to be authorised by TPR, would be suited to CDC.
62.Regulation, supervision and authorisation of CDC schemes would be a further addition to the workload of TPR, which we have criticised as being timid and ineffectual in its regulation of DB schemes. This raises the question of TPR’s ability to oversee a successful launch of CDC. Ronan O’Connor told us putting TPR in charge of an authorisation regime for CDC schemes made him “nervous” as it would “put a lot of reliance” on that organisation. TPR has, however, been allocated substantially increased funding by the DWP. CDC schemes can also be expected to supersede DB schemes as that sector continues to decline. TPR has committed to a programme of cultural change under which it expects to be stronger and faster in intervening in schemes to protect member interests.
63.The Pensions Regulator is already responsible for reviewing the actuarial valuations and funding plans of defined benefit pension schemes. It is also responsible for authorising and supervising defined contribution master trusts. Regulatory coherence demands that these responsibilities should extend to CDC schemes. This will, however, place additional demands on an organisation which has underperformed in its defined benefit responsibilities. We recommend that the Government’s consultation include an assessment of The Pensions Regulator’s suitability and readiness to regulate CDC schemes in terms of its skills, staffing and resource levels and what enhancements may be needed in order for it to perform this new function effectively. We will continue to monitor closely the performance of the Pensions Regulator as part of work to assess whether the current split regulatory regime for pensions best serves the interests of scheme members.
64.The initial interest in CDC has, in Royal Mail, come from an individual major employer. As CDC schemes, unlike DB schemes, do not require a sponsor to underwrite past accruals, they do not require employer sponsors in the traditional sense. This opens the way for considerable diversity in the provision of CDC schemes. These could include:
65.These are early days for CDC in the UK. The initial impetus has come from a major employer and trade union seeking an alternative to traditional defined benefit and defined contribution arrangements respectively. But establishing CDC schemes in the UK opens the possibility of more diverse and ambitious provision of collective pensions. These could include industry or profession-wide schemes. CDC may also be an opportunity to provide more attractive pension options to self-employed people and gig economy workers. The Government should seek to encourage such innovation, and its great potential gains, in establishing a framework for a new wave of collective pensions. We recommend that regulations governing CDC should accommodate mutual, multi-employer and standalone schemes.
66.In many matters individuals want as much freedom and choice as possible. In other areas they crave collective security, particularly when the choices they face are likely to affect their livelihood over many decades. CDC not only provides the best means that we have seen so far of reconciling these aspirations in the pensions arena but also holds out the promise of reviving and sustaining the provision of company pensions for generations to come, at a time when the defined benefit model is coming slowly and not so peacefully to its close. We urge the Government to build on its initiative with the Royal Mail pension scheme to bring about the next great pensions revolution in this country and restore the UK to being among the very best pension systems in the world.
110 (Sandeep Maudgil)
112 (Sandeep Maudgil)
113 Written evidence from the Department for Work and Pensions ()
114 on Priorities on pensions [Baroness Altmann, Minister of State for Pensions]
115 Written evidence from the Department for Work and Pensions ()
116 Written evidence from the Department for Work and Pensions ()
117 Written evidence from the Department for Work and Pensions ()
119 (Philip Bennett)
120 Written evidence from Philip Bennett () para 1.6
121 Written evidence from the RSA ()
122 Written evidence from the Department for Work and Pensions ()
123 Written evidence from Association of Consulting Actuaries (), Mark Rowlinson (), Association of British Insurers () para 26
124 Written evidence from the Society of Pension Professionals ()
125 Written evidence from the Institute and Faculty of Actuaries ()
126 Written evidence from Philip Bennett () para 1.6
127 Written evidence from Philip Bennett () para 1.2
128 Written evidence from the Department for Work and Pensions ()
129 Written evidence from the Department for Work and Pensions ()
130 (Guy Opperman MP)
131 Written evidence from B&CE Ltd (), Trades Union Congress (), Institute and Faculty of Actuaries ()
132 Written evidence from the Communication Workers Union (), paras 11 & 38
133 Written evidence from B&CE Ltd ()
134 Written evidence from B&CE Ltd (), Unite the Union ()
135 Written evidence from Mark Rowlinson (), John Ralfe ()
136 Written evidence from Willis Towers Watson () para 31.
137 Written evidence from the Association of British Insurers ()
138 Work and Pensions Committee, Sixth Report of Session 2016–17 , HC 828, paras 33–34
139 Written evidence from Pensions Management Institute (), Redington () para 13a, Association of Consulting Actuaries (); Willis Towers Watson () para 30
140 Written evidence from NEST (), PLSA ()
141 Written evidence from John Ralfe ()
142 Written evidence from the CBI ()
143 (Kevin Wesbroom)
144 CPB Netherlands Bureau for Economic Policy Analysis (28 Oct 2013) (in Dutch); CPB Policy Brief 2014/01, 15 Jan 2014 (in Dutch); Written evidence from John Ralfe (); Presentation by Bastiaan Starink (Tilburg University/Netspar/PwC) and Presentation by Ed Westerhout (Tilburg University/Netspar/CBP) to Pensions Workshop at Cass Business School, 9 April 2018
145 Written evidence from B&CE Ltd (), Mark Rowlinson (),
146 Written evidence from Philip Bennett () para 1.20, Barnett Waddingham () para 15
147 Written evidence from NEST ()
148 Written evidence from Philip Bennett () para 1.5
149 Written evidence from First Actuarial LLP ()
150 Written evidence from Philip Bennett ()
151 Written evidence from Henry Tapper ()
152 Written evidence from Philip Bennett () para 2.8
153 Advice must be taken before making transfers worth over £30,000. and
154 Work and Pensions Committee, Sixth Report of Session 2017–19 , HC 828
155 Written evidence from Philip Bennett () para 2.7; Willis Towers Watson () para 46, Association of British Insurers () para 23.
156 Written evidence from the Communication Workers’ Union (), Philip Bennett (), B&CE Ltd (), the Association of Consulting Actuaries (), (Hilary Salt), (Kevin Wesbroom)
157 Written evidence from Association of British Insurers ()
158 Written evidence from Unite ()
159 The and the together set out the specific duties of pension scheme trustees including the knowledge and understanding required of trustees, and the rules for appointing and removing trustees. The makes specific provision for DC mastertrusts.
160 FCA/TPR (19 Mar 2018)
161 Written evidence from Institute of Faculty of Actuaries ()
162 Written evidence from B&CE Ltd ()
163 Written evidence from Royal Mail Group () para. 22
164 (Kevin Wesbroom)
165 (Dr Alwin Oerlemans)
166 Written evidence from B&CE Ltd (), Unite the Union () and First Actuarial LLP (). See also Aon () para 3.6.2
167 Written evidence from Aon () para 3.6.3
168 Written evidence from Redington ()
169 (Guy Opperman MP)
170 Written evidence from Philip Bennett () and Pension and Lifetime Savings Association () Pensions Management Institute (), KPMG (), B&CE Ltd ()
171 Business, Energy and Industrial Strategy and Work and Pensions Committees Second Joint report of Session 2017–19, , HC 769
172 (Ronan O’Connor)
173 TPR’s 2018–19 budget is £88.66 million, an increase of £4.34 million (+5.15%) compared with full-year spend of £84.32 million in 2017–18. Source:
175 Written evidence from Con Keating ()
176 Written evidence from Con Keating ()
177 Written evidence from First Actuarial LLP ()
Published: 16 July 2018