Marvin OnumonuRetirement incomes could rise by as much as 60% after the Government gave the go-ahead for collective defined contribution (CDC) pension schemes.
The new rules are set to benefit millions of workers across the UK by pooling pension savings and providing regular payments for life.
Research found CDC schemes could offer more security compared to individual defined contribution schemes.
The changes will allow more employers to use CDC schemes and are expected to help meet a strong demand for secure retirement income.
Almost three-quarters of people with defined contribution pensions want a guaranteed income in retirement, but half still take their savings as a lump sum.
Pooling funds in CDC schemes is expected to help schemes invest more in UK businesses and infrastructure, supporting economic growth.
Pensions Minister Torsten Bell, said: “Too often people approaching retirement are left navigating complex choices and shoulder risks they shouldn’t have to face alone.
“Collective pensions offer savers a new option that in many cases will be a better deal, one where risks are shared, returns are smoothed and retirement incomes are stronger and paid for life.
“By expanding CDC to more employers and consulting on retirement CDC, we are helping build a fairer pensions system that gives people confidence their hard-earned savings will last and they can enjoy their retirement.”
David Pitt-Watson, director of the CDC Forum, said: “This is a major step forward for pension provision in Britain.
“If employers who sponsor pensions follow through, it will mean private sector workers, as well as those in the public sector, have an effective pension which will last them until the day they die.”
The Government is also launching a consultation on ‘retirement CDC’, which would let people with defined contribution pots transfer into a CDC scheme at retirement.
The aim is to give more people a regular income for life that keeps up with rising prices, without the need to manage their money themselves.
Reaction:
Zoe Alexander, executive director of policy and advocacy at Pensions UK:
“Multi-employer CDC schemes have the potential to boost retirement savings by sharing risks between savers.
“Success depends on striking the right balance between strong protections for members, simplicity and fairness of scheme design.
“We agree with Government that innovation in CDC carries huge promise for savers and are pleased that this Government is supporting the development of both multi-employer and at-retirement CDCs.”
Nausicaa Delfas, CEO at TPR:
“We are all working towards turning a savings system into a pensions system which provides a sustainable income through later life.
“Innovative solutions like retirement-only CDC schemes could play a part in this, and I’d encourage people to get involved with the upcoming consultation to ensure their ideas are heard.”
Pretty Sagoo, managing director of defined benefit solutions at Just Group:
“At a time when pensions policy is enjoying long-overdue attention, the government’s exploration of ways to further improve retirement income is welcome.
“Most DC savers expect their pension to provide the income needed to help them achieve financial security in retirement.
“Retirement CDC could be a valuable answer to that challenge for some schemes and scheme members, in addition to other solutions that are already available or are coming to this market.”
Jane Kielty, UK chief executive officer at Aon:
“We are very pleased to host Torsten Bell MP, at Aon’s London offices for the CDC Forum launch.
“Aon is a long-standing promoter of CDC’s development in the UK – dating back to 2013 – and we have been actively involved in shaping the whole‑life multi‑employer CDC regulations to be announced today.
“We believe that these regulations will open the floodgates for all employers – and therefore over 25 million workers in the UK – to have the opportunity to use their defined contributions to build up a pension during their working lives.”
Chintan Gandhi, partner and head of collective DC at Aon:
“These regulations are a huge step for UK CDC. They will open up the market to multi-employer whole-life CDC schemes, including those provided by master trusts, enabling them to meet the needs of all employers and the self-employed – regardless of the size of their workforce or their contribution budgets.
“In offering employees whole-life CDC, employers’ and employees’ defined contributions can be pooled, together with investment and longevity risks being shared across the entire scheme membership.
“Crucially, whole-life CDC provides employees with an income for life in retirement that is expected to keep pace with the cost of living, and without individual employees needing to make complex decisions.
“It’s also exciting to see the emergence of a vision for retirement CDC which paves the way for all retirees – regardless of how they’ve built up their pension saving – to access the benefits of CDC when they retire.”
Andy O’Regan, chief client strategy officer at TPT Retirement Solutions:
“The publication of multi-employer Collective Defined Contributions (CDC) regulations marks a major leap forward for the UK pensions industry.
“For the first time, employers of all sizes will be able to access the benefits of Collective DC provision, paving the way for better outcomes for members and greater scale in this new model.
“The new rules will allow more workers to receive incomes for life in retirement, avoiding the need to make difficult decisions, while employers will maintain the cost certainty they have with DC provision.
“Earlier this year, we announced our intention to launch a multi-employer CDC scheme – just days after Pensions Minister Torsten Bell set out the timeline for this new legislation.
“Currently, the UK has just one single employer CDC scheme, so we’re proud to be leading the next wave of pension innovation in the UK.
“We are also pleased to see that government has today published its plans on retirement CDC for consultation.
“Unlike the whole-life model, CDC in decumulation does not pool investment risk in accumulation, but it does take advantage of longevity pooling in a similar way, to provide a lifelong income in retirement.
“As such, this model could be of particular interest to DC schemes which will be required to offer members a ‘guided retirement default’ in future years.
“We will continue to engage with government to help shape the regime for this model.”
David Brooks, head of policy at Broadstone:
“CDC is a divisive solution but while it may not be perfect, it could certainly prove to be good enough.
“On one hand it satisfies the desire for a return to some degree of paternalism in pensions where people can, in return for their share of the cost, receive an income for life albeit without the gold plating of traditional defined benefit pensions.
“However, on the other there are question marks over whether it can provide better outcomes than individual defined contribution pensions or whether it can resolve accusations of inter-generational fairness.
“While this idea may be too late for many employers it is hoped that enough will see this as a way, without open ended costs, of providing a more secure income for employees in their retirement.
“Despite the downsides of CDC, there are enough upsides to see this as a positive step forward with people able to receive a more secure income without having to make complex financial decisions at crucial pinch points in their life.
“The details of the regulations being laid will be key to whether this innovation can encourage enough employers to take the leap and participate.”
Mark Futcher, partner and head of DC pensions at Barnett Waddingham:
“Following the Pensions Commission launch earlier this year, a green light on CDCs reinforces the Government’s ambition to drive reform that delivers better retirement outcomes.
“But while this momentum is encouraging, good reform should be about cultivation, not upheaval.
“CDC offers potential, but much of what it seeks to fix can already be addressed within the existing DC system if providers are simply given the room to innovate.
“Any development that supports stronger retirement futures should be welcomed, but the challenge will be achieving progress without adding unnecessary complexity.”
