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Government backs first UK collective DC pension scheme

Plans to introduce the UK's first collective defined contribution (CDC) pension scheme, proposed by Royal Mail and the Communication Workers Union (CWU), have been backed by the UK government.21 Mar 2019

The government intends to legislate to allow for the creation of the Royal Mail scheme "as soon as parliamentary time allows". The legislation will be drafted in such a way as to allow the government to "move promptly to other forms of CDC benefit provision", it said in its response to November's consultation on the proposals.

UK work and pensions secretary Amber Rudd said that the proposals "should deliver improved investment returns for workers and savers".

Pensions expert Cameron McCulloch of Pinsent Masons, the law firm behind Out-Law.com, described the government's response to its consultation as "encouraging".

"It is clear that CDC is here to stay, at least in the short-term," he said.

"Whilst the limited application of the current legislation will restrict the take-up of CDC by employers generally, it will also give the government more time to explore other models and to widen the scope of CDC beyond the initial Royal Mail arrangement. It will also give the government the chance to learn from any issues arising as part of the set-up and operation of the Royal Mail arrangement," he said.

"Long-term, the success of CDC will come down to a number of factors but in particular, in communicating clearly with members in relation to the benefits payable and in ensuring that employers are not required to pick up the tab due to a fall in the value of the overall fund. These issues are important, but employers will be looking at the Royal Mail arrangement in the meantime to see if CDC can deliver on the prospect of better outcomes for its members," he said.

CDC pensions are currently used in Denmark and the Netherlands, and involve pooling member contributions together to form a single fund for investment purposes. The trustees set out a target level of member benefits, but this is not guaranteed by the employer unlike in a traditional defined benefit (DB) pension scheme, such as a final salary scheme. CDC also differs from traditional DC scheme, where the final value of the pension a member receives depends on the performance of that member's individual contributions.

The consultation response confirms that the first CDC schemes will fit the model proposed by Royal Mail and be occupational trust-based money purchase schemes run by a single employer or associated employers. However, the government has noted the interest from consultation respondents in other models, such as decumulation-only schemes and multi-employer master trusts, and hopes to "begin working with interested parties to develop a legislative framework" for some of these models once the Royal Mail scheme has properly "bedded in".

The government intends to legislate for an "appropriate regulatory framework" for CDC schemes, which will be overseen by The Pensions Regulator (TPR) and based on a modified version of the principles which apply to traditional DC schemes. Schemes seeking authorisation will be required to provide evidence that the scheme's design is "robust" should the underlying actuarial assumptions change, and to develop a strategy to manage any operational risks that arise over the lifetime of the scheme.

Schemes would be required “to provide evidence to satisfy the Regulator that they have taken actuarial advice with appropriate certifications and have undertaken robust modelling” but a requirement in an earlier version of the rules that they undertake an independent review of their actuarial assumptions appears to have been dropped. The government has decided against mandating a minimum size for CDC schemes following responses to the consultation.

Trustees would be required to clearly communicate to members the potential that benefits paid out could fluctuate in line with investment performance. Protections will be built into the system to ensure "inter-generational fairness" for scheme members. Members will be given a statutory right to transfer their benefits to a scheme which allows access to the pension 'freedoms' before retirement, based on that individual's "share of the fund". They may be required to seek financial advice before doing so, although the government notes that suitable financial advice "may be very difficult to find before CDC schemes become fully established in the UK pension landscape".

The government still intends to impose the same 0.75% cap on member-borne charges that currently applies to pension schemes used for automatic enrolment to CDC schemes. However, it notes that further work will be required to develop a CDC-specific cap and charges regime. Changes to tax legislation may also be required to accommodate CDC schemes, and HM RC will consult on the technical details of any necessary tax changes "in due course".