The Government’s consultation on a new type of pension for the UK know as Collective Defined Contribution (CDC),and favoured by the Royal Mail for its staff, is due to close. Contributor Nathan Long, Senior Analyst – Hargreaves Lansdown.
There’ll be winners and losers from this new type of CDC pension scheme that collectively pools everyone together. The Government must ensure any new schemes will be flexible enough to cope with the demands of the retire-as-you go generation and their modern working patterns. These pensions share similarities with ill-fated With Profits pensions from the 80s and 90s, so there’s loads of experience to draw on to make sure mistakes aren’t repeated.
Many people won’t like the lack of control that comes hand-in-hand with this type of pension, so we’d like to see the Government insist any employers offering these plans also enable alternative access to a defined contribution scheme.
Auto-enrolment has restored some faith and trust in the pension system which cannot be jeopardised. All pension schemes are too important to fail, but these plans come with a large side helping of complexity, so should be subject to stress tests similar to those applying to banks.’
Employers should only be able to set up a CDC scheme where it is designed to be flexible enough to make it compatible with modern employment patterns. This means starting and stopping pensions in payment, allowing partial benefits to be taken, allowing employees to exercise choice of membership and allowing transfers out to happen either in full or in part up to the point all benefits are taken.
All employers offering a CDC scheme should have to offer staff alternative access to a DC pension offering exactly the same contribution structure. This will mean people who do not want to be members of a pension that offers both no guarantees and no choice of investments, still have the ability to receive valuable company pension contributions.
Don’t over promise – Modelling of the potential benefits hasn’t factored in members transferring away from a CDC pension. Experience shows those with larger pensions and those who anticipate a shorter life expectancy may want to transfer away at retirement, which would reduce the potential returns that have been modelled to date. This should be reflected in expectations of the performance and benefits of CDC schemes relative to conventional DC pensions.
Too important to fail, treat these new pension schemes like banks – Each scheme should be stress tested and certified as viable by an independent actuary, both at the outset and on an ongoing basis.
Use early adopters as test cases – Initially CDC pensions look set to only be available for single, large employers. Wider roll out into multi-employer schemes should be parked until we’ve got experience of their performance through a stockmarket downturn.
Explain investments when communicating with members – Scheme trustees should be obliged to ensure members are engaged with their retirement savings and understand the risks and benefits of the CDC benefit structure, this should help offset the uncertainty of future benefits.