Collective defined contribution (CDC) provision will be introduced slowly, starting specifically with a Royal Mail scheme and then be rolled out more widely, the government has confirmed.
In a consultation response, published today (18 March), the Department for Work and Pensions (DWP) said this is a “very complex area of legislation” and that “we need to be sure that we have the detail right for the Royal Mail scheme before we extend the provision to other, arguably more riskier, models”.
The DWP confirmed that it will introduce the legislation – which was put on hold in 2015 and revived by Royal Mail and its union – “when parliamentary time allows”.
The government intends to extend the legislation to master trusts, mutual insurers and multi-employer schemes once the Royal Mail plan has had some time to roll out.
The DWP said it would also introduce an authorisation regime for CDC schemes, overseen by The Pensions Regulator (TPR), similar to the one for DC master trusts which was introduced last October.
Members of CDC schemes will also be able to access the pension freedoms – which were introduced in 2015 – while an annual charge cap will be set at 0.75% of the value of the whole CDC fund or an equivalent combination charge – the same level set for DC schemes.
Furthermore, HM Revenue and Customs will publish a consultation in due course on the technical details of any necessary tax changes, with the DWP planning for CDC members to “have opportunities to register and benefit from tax relief in a similar way to those with DB or DC benefits.”
CDC benefits will be subject to income tax in the same way as other pension provision, while the scheme type will be eligible for use for auto-enrolment (AE) purposes, as long as they comply with relevant legislation.
But the DWP has rejected ideas for CDC schemes to have a ‘capital buffer’, as they do in the Netherlands, which would smooth investments and provide a more predictable income.
Secretary of state for work and pensions Amber Rudd said introducing a completely new pension scheme to the market is yet another “revolutionary reform in this government’s quest to transform the retirement saving culture in this country”.
“These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators,” she continued.
“The new type of pension is currently used in Denmark and the Netherlands – two countries widely recognised as having among the best pension systems in the world.
“Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industry to enhance the prospects of millions of workers.”
The government has been working closely with Royal Mail and the Communication Workers Union (CWU) to develop the proposals which went out to consultation last November.
Royal Mail chief risk and governance officer Jon Millidge noted this is a “very welcome progress.”
He added: “We now look ahead to the next stage, and ultimately, delivering the UK’s first CDC pension.”
CWU deputy general secretary for postal Terry Pullinger added that the response to the consultation on these proposals, and the degree of support from many key players, confirmed his belief that the pensions industry is in genuine need of scheme innovation.
He said: “We are very proud and ready to be at the forefront of this historic moment which we believe will make a major contribution to offering future dignity and security in retirement for decent working people.”
While some welcomed the slower rollout to better understand the actual experience of CDC schemes, others were cooler on the long timetable to introduce the provision more widely.
Royal London director of policy Sir Steve Webb welcomed the move, but lamented that the legislation would be “very narrow in scope”.
“Even for Royal Mail, it is likely to be several years before a scheme could be up and running,” he said. “If others employers want to use a different model, this could need new primary legislation and we would probably be talking about the mid-2020s before further schemes could be in place.”
He said he was disappointed that the legislation did not allow for a capital buffer, and added Brexit may be stifling the government’s ability to produce comprehensive legislation.