Collective defined contribution pensions Contents

Conclusions and recommendations

Arguments for and against CDC

1.Through the pooling of risk, CDC offers scheme members the potential for better pensions than from standard defined contribution saving. It may be particularly appealing to people who desire a regular and reliable income in retirement. For employers keen to offer their workers decent pensions but reluctant to take on large potential liabilities, CDC is an attractive alternative to defined benefit schemes. CDC would therefore be a good choice for some employers and some savers that addresses limitations in their current options. To offer more good choices is entirely consistent with pension freedoms. (Paragraph 32)

2.While the Government has rightly emphasised, and succeeded in, ensuring more people save for retirement, that focus should not preclude enabling new models of pension provision. The job of selling the benefits of retirement saving is made easier if the saver has a desirable pension to look forward to. (Paragraph 33)

Royal Mail agreement

3.Royal Mail Group and the Communication Workers Union are to be congratulated for their remarkable unity of purpose in pursuing a CDC scheme for all the company’s employees. As well as a model of constructive industrial relations, Royal Mail could act as a model for new collective pension schemes. The Government is rightly seeking to support the Royal Mail agreement and to future-proof its legislation to enable the introduction of CDC schemes at other companies. In doing so, it is opening the door for CDC to move from abstract idea to practical reality. (Paragraph 39)

Legislative change

4.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. (Paragraph 46)

5.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. (Paragraph 50)

6.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. (Paragraph 53)

7.We recommend that the Government consult on:

8.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. (Paragraph 56)

9.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. (Paragraph 60)

10.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. (Paragraph 63)

11.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. (Paragraph 65)

12.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. (Paragraph 66)

Published: 16 July 2018