In its response to the recent consultation on collective defined contribution (CDC) pension schemes, the Government has confirmed that it intends to move forward with the necessary primary and secondary legislation required to allow CDC schemes of the form envisaged “as soon as Parliamentary time allows”.
The consultation response largely confirms the position advocated by DWP in the consultation. Details include:
- CDC schemes will be defined in legislation as a type of money-purchase benefit – this will ensure there is no ongoing obligation on sponsors to support the scheme should the funding level fall short of that needed to pay the target level of benefits;
- The Pensions Regulator will have responsibility for the approval and oversight regime – an ongoing supervision regime will monitor schemes’ continuing compliance with the required standards to remain authorised;
- Some key design principles have been established – for example that the approach to adjusting benefits should be clear and unambiguous in the scheme rules (rather than at Trustee discretion) and member communications, and that any increase or decrease in benefits resulting from scheme performance or changed assumptions should be applied across the entire membership;
- Detailed scheme design will be for employers to decide – aside from the key design principles as above, key decisions such as the level of target benefits, and whether to introduce a capital buffer into the schemes’ funding approach will be for employers to decide (subject to compliance with the approval regime);
- Annual valuations will be required on a best estimate basis – DWP confirm their proposal that valuations should be annual and carried out on a ‘best estimate’ basis as judged by the scheme actuary;
- CDC benefits will be subject to a similar charge cap to defined contribution (DC) schemes – proposals include an annual charge cap of 0.75 percent of the value of the whole CDC fund (or an equivalent combination charge) with the same scope as the charge cap for individual DC schemes; and
- Transfers out must be permitted to ensure consistency with freedom and choice – members will have a right to a transfer of their benefits before retirement on a share of fund basis. This ensures consistency with the greater freedom and choice introduced in the Pension Schemes Act 2015, but will also raise concerns over scheme sustainability and selection bias.
Key challenges remain
Many of the key challenges of CDC remain unanswered and will require further consultation before detailed regulations are brought forward. These include:
- Member communications – arguably one of the greatest challenges - there is a real risk of members not understanding what they are buying into, especially if and when benefits are being pared back. While DWP reiterate that effective communication is critical, there is little detail on the expected requirements at this time; and
- Clarity on practicalities, such as compliance with auto-enrolment and tax treatment (most critically how to assess CDC schemes against the Annual Allowance and Lifetime Allowance).
Click here to read the consultation.
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