The Department for Work and Pensions is exploring if it could introduce legislation for collective defined contribution schemes exclusive for decumulation, since these could help “improve member choice and outcomes”.
The government published a consultation on introducing a route to CDC for multi-employer schemes and master trusts, after legislation creating these schemes was introduced in 2022.
Under these schemes, employers and employees pay a fixed rate of contributions, collected in a manner similar to DC schemes.
Benefits are paid with a target in mind, similar to defined benefit schemes, but with the prospect of variable increases — and the possibility of decreases.
However, besides interest in whole-life CDC schemes catering for multi-employer schemes, stakeholders are also interested in the potential for CDC decumulation-only arrangements.
Such arrangements “could provide those approaching retirement with an income product that allows them to share investment and longevity risk,” the consultation stated.
In addition, a CDC decumulation fund has the potential to provide, on average, better returns than the traditional options of annuities or drawdown, since “their longer-term investment horizons mean they will be able to invest more in higher return seeking assets for longer,” the DWP stated.
Despite acknowledging the benefits of such product, the DWP warned that “stakeholders acknowledged that careful consideration is needed”.
For example, how the set-up and provision of such products would be funded, how sufficient scale would be achieved, their overall sustainability, and how a fair buy-in price will be delivered for prospective members over such arrangements’ lifetimes, it noted.
While asking for the industry views on these issues, the DWP has established a series of principles which should be retained for decumulation only arrangements:
- the CDC benefits in these arrangements must be collective money purchase benefits.
- the arrangements would be offered through a trust based occupational pension scheme.
- such arrangements will require authorisation and supervision by the Pensions Regulator to help ensure only well designed and well-run schemes can operate and to protect the interests of members.
- an authorisation fee would apply.
- CDC benefits would be subject to annual valuation and adjustment.
The government also noted that while it is open to consider other options, it is minded to include an expectation that schemes aim to provide inflation-linked increases in decumulation, “as this can significantly smooth the impact of market shocks and reduce the likelihood of cuts in nominal benefit rates”.
LCP Partner Steven Taylor noted that once operational, decumulation-only CDC “could be very attractive to the current generation of private sector savers who have only ever known DC schemes, especially if, as hoped, they can offer significantly higher starting pensions than traditional annuities.”
Pensions minister Laura Trott said: “By extending our secure and dependable CDC framework, more members will be able to benefit from the opportunities of sharing risk.
“This means their pension savings work harder for them, and provide, on average, a better outcome for their retirement than might otherwise be available.”
maria.espadinha@ft.com
