DWP launches consultation to legislate for CDC

Kim Kaveh reports...

The Department for Work and Pensions (DWP) has launched a consultation to “shape future legislation” for collective defined contribution (CDC) schemes.

Launched today, the consultation is seeking to gather views from across the industry with the aim of ensuring that collective forms of saving will deliver for both employers and employees.

For example, in order to protect the investments of members and to ensure costs are controlled, the DWP is proposing that all CDC pension schemes will be subject to a charge cap of 0.75%, set at the same level as defined contribution (DC) schemes.

Under government proposals, CDC schemes will also be required to undertake annual independent valuations once they have been authorised to ensure that members are protected and schemes are sustainable – with CDC trustees subject to fit and proper persons test.

Furthermore, the DWP wants to know how schemes can best communicate with members to ensure they understand the risk that their benefits could go down as well as up, even when in payment. It is also asking if CDC benefits should be classified in legislation as a type of money purchase benefit, and whether there are any other areas where the current money purchase requirements do not fit, are inappropriate or could cause unintended consequences.

Commenting on the launch of the consultation, minister for pensions and financial inclusion Guy Opperman¬†(pictured) said: “CDC pension schemes are an important innovation which will provide more choice and flexibility for pension scheme members and employers.

“I’m grateful to Royal Mail and the Communication Workers Union (CWU) for their assistance in getting us to this point. It is important we get this right which is why we’re consulting on the detail of our proposals before bringing legislation forward.

“I want to hear the views of the pensions industry as we prepare to introduce CDC pension schemes.”

The DWP initially indicated its support for collective forms of pension saving in September. The announcement was immediately welcomed by Royal Mail which, along with its workers and trade union has been pressing the government to allow for such schemes. Earlier this year, Royal Mail collectively agreed in principle to introduce the UK’s first scheme as soon as possible for 141,000 employees.

Reaction

Royal Mail Group chief governance and risk officer Jon Millidge is delighted that the government has launched a formal consultation on enabling CDC pensions in the UK.

“The consultation is a major step forward in our campaign to allow us to offer a CDC scheme for our employees as soon as possible.

“We believe CDC is a progressive option which meets our objectives of providing sustainable, affordable and secure future retirement arrangements. Royal Mail and the CWU want to see CDC become a reality in the UK, and we hope the required legislation will be introduced at the earliest opportunity.”

CWU deputy general secretary postal Terry Pullinger also welcomed the consultation. He said: “We absolutely believe that retirement dignity and security will be swept aside for working people unless this important innovation in pension choice is enabled.”

He added that this is no longer about the indulgence, luxury or comfort of academic opinion, it is about introducing a tangible solution for 141,000 decent working people, that provides genuine hope for an occupational wage in retirement pension running alongside their state pension.

“The CWU and Royal Mail Group are ready to lead and illuminate a path for others to follow should they choose. If not us then who, if not now when? Give us our moment and we will make a very important development in our social history.”

Last month, industry experts noted that the advent of collective pensions systems could help the UK avoid demographic challenges which will make it “impossible” for society to help savers in retirement. The scheme type also has the backing of the Work and Pensions Committee, which in July said CDC schemes would be part of the “next great pensions revolution”, helping to return the UK’s system to “among the best pension systems in the world”.

However, CDC has proven divisive, with many also worried about the potential risks involved with the largely untested provision. For example, in a report published in July, Centre for Policy Studies research fellow Michael Johnson said that CDC is a “risk too far” and that with-profit funds would provide a better solution.

The DWP’s confirmation of a consultation came as support for CDC schemes continued to grow in the House of Commons. Conservative MP for East Renfrewshire Paul Masterton – previously a pensions solicitor at Pinsent Masons – had tabled a 10 Minute Rule Motion’ for 17 October, calling for “a bill to enable the establishment of CDC pension schemes”.

The consultation will run until 16 January.