"The historic deal struck between Royal Mail and CWU, combined with the Government’s ready willingness to make CDC pensions a reality, mean a huge change is coming"
The Pensions Minister has confirmed the imminent publication of a consultation paper on the design and implementation of CDC schemes, after Royal Mail reached a deal with the Communication Workers Union which sought to launch CDC pensions in the UK.
CDC schemes, which are already popular in Denmark and the Netherlands, offer a regular retirement income but in the form of a target benefit rather than DB schemes’ “guarantee”.
Changes in the funding position of the scheme are addressed by adjusting the benefit rather than calling on extra contributions from the employer. CDC gives companies the option of offering good pensions to their staff without the risk of large long-term pension liabilities on their balance sheets.
Several studies have shown that CDC schemes could offer more generous and predictable benefits than individual DC provision, through the feature of risk pooling.
The DWP has confirmed further primary legislation will be required to bring forward new CDC schemes of the kind the Royal Mail has been looking at developing.
The upcoming consultation paper will consider the appropriate methodology for calculating cash-equivalent transfer values for CDC members before retirement, and how best to communicate the risks and benefits of the scheme.
It will also decide whether members should be allowed to transfer out once in retirement and if so how transfer values might be calculated.
Frank Field, chair of the Committee, said: “This is a great response and a great news story for everyone, a real win-win situation. I applaud the Government for the approach it is taking. The historic deal struck between Royal Mail and CWU, combined with the Government’s ready willingness to make CDC pensions a reality, mean a huge change is coming to the UK pensions landscape, offering a new and different kind of ‘pension choice’."
Tom McPhail, head of policy at Hargreaves Lansdown, commented: “CDC scheme are quite similar to with-profits funds. This means the controls, scrutiny and member communication have to be absolutely spot on to avoid the risk of members’ expectations being disappointed.
"The fact an Act of parliament will be required to make them happen will come as a disappointment to those who thought the Coalition government had laid the necessary ground work back in 2011. CDC schemes may one day become part of the UK’s pensions landscape but at the moment it is all a bit theoretical, in the meantime the priorities are to help investors get the best out of the existing defined contribution schemes.”
