Earlier this year, pensions and financial inclusion minister Guy Opperman announced the government will proceed with legislation to implement collective defined contribution (CDC) schemes.
It will be introduced slowly, starting with Royal Mail, which has been working with the government and the Communication Workers Union to develop the proposals which went out to consultation last November.
The government is further considering how to roll out CDC more widely, which means some of the big players in the market could consider offering this provision. This includes DC master trusts which have either been authorised, or are awaiting their fate from The Pensions Regulator (TPR) as part of a regime which kicked off last October.
At a CDC roundtable hosted by Salvus and AllianceBernstein on 22 May to debate who is best placed to offer this type of arrangement, speakers were generally positive about master trusts doing so, but had varied ideas on how this should play out.
Some agreed there should be different models of CDC, such as First Actuarial director Henry Tapper. He said: “I can see lots of different types of structures for schemes with different membership demographics in master trust type structures which would embrace CDC.”
Punter Southall Governance Services client director Gerald Wellesley agreed, adding that hopefully there will be different brands that employers can align themselves with.
“There is the opportunity of getting the “different flavours” of CDC and the market will probably grab it, because all of the problems with accumulation are just going to escalate further.
“Post authorisation we will have the credibility of master trusts which might be a driver of something solid to kick this off. So I don’t see any real barriers apart from getting the legal framework in place.”
If CDC was to be introduced for master trusts, it would likely be in the form of secondary legislation. As Pinsent Masons pensions partner Matthew De Ferrars pointed out, “they would be introduced as regulations rather than new acts so it would be easier to get through that legislation for other types of schemes [such as master trusts] rather than getting it through parliament”.
However, if master trusts were to offer CDC, communication would have to be on point. De Ferrars said: “If master trusts can demonstrate to employers it’s a very clear, clean communication package, [then] it’s going to be pretty convincing as a proposition.”
Master trusts would also need to be able to show how they would distribute CDC. Tapper agreed, adding that this must be done in “absolute detail”, so that people can turn around and say “ah, that’s what’s working, that’s what isn’t working”.
He added: “People have to have the right to get out of a CDC arrangement if they don’t think it’s going to work. I think that is absolutely critical. If you enter into an invested contract with limited amounts of solvency stuff around the outside, and you feel uncomfortable about that you’ve got to be able to walk away.”
It is also essential to have safeguards to ensure master trusts are behaving properly, and so that there is trust in the system.
As De Ferrars noted, the starting point is the authorisation regime so the regulator’s going to have a “bird’s eye” on that.
“Then it’s about the governance of the arrangement – so the trustee board, tried and tested approaches from defined benefit and defined contribution, and the raising of standards.”
The speakers also discussed which risks would be shared between employers and employees.
According to Tapper, one really interesting question to ask is whether people should opt into CDC or if they should be co-opted in by their employers.
“I think the risks are entirely different if people choose to be in CDC, than if an employer chooses for them to be in CDC because the employer effectively takes some kind of decision on behalf of the members and has completely different responsibilities, which you would under auto-enrolment.
“Whereas, if the member chooses, they will be making a conscious decision to be opting in and taking the risk. Consumers would not have to get a financial adviser or have to worry about the markets going up and down, which is immensely attractive to consumers.
“People don’t want to have to make a whole lot of tough decisions about longevity, drawdown rates, investment strategies and all that stuff. So they would want an easy default option, and that’s where the CDC thing scores.
“So my vision of CDC is that when it becomes part of a triage process, which would happen over time, people would opt into it rather than something that employers drive for their staff.”
But there are also drawbacks such as ongoing complexity with CDC arrangements.
De Ferrars explained: “Employers have sort of moved away from schemes where you need lawyers and actuaries and to go back to that is going to be a bit of an ask, particularly when you’ve got the need for two actuaries potentially and valuations every year. Our hands could be tied by the regulatory framework.”
Now that master trusts are operating under a regime which instils good governance, introducing CDC could be a good idea to boost members’ retirement pots. But this should not be rushed, and communication must be on point.