Industry bodies say retirement CDC model has lots of ‘moving parts’ which may act as a hindrance

The government must address some “critical” challenges to ensure successful implementation of retirement collective defined contribution (CDC), industry bodies have said.

In its response to the Department for Work and Pensions’ Retirement CDC Pension Schemes consultation – which closes for comments today (4 December) – the Pensions Management Institute (PMI) said it supported the government’s ambitions to increase access to CDC benefits and deliver more sustainable outcomes for members, but stated success would depend on addressing “critical” challenges regarding design, governance and communication.

The PMI said while it welcomed the proposal to allow retirement CDC within master trusts and unconnected multi-employer schemes, the viability of the model depended on scale, trustee confidence and member engagement. The institute said trustees must be provided with the means to assess the suitability of retirement CDC and warned defaulting members into an “irrevocable” product raises significant fiduciary and ethical concerns.

The PMI’s response also stressed that without the ability to default members or secure early scale, retirement CDC could struggle to launch with sustainable investment strategies. It added the proposed prohibition on marketing to members risks creating an “unlevel playing field” and could undermine informed choice.

The institute called on the government to consider how retirement CDC could be integrated into a broader framework of guided retirement with the necessary safeguards and flexibility. Earlier this week, the Association of Consulting Actuaries and the Association of Professional Pension Trustees and the Society of Pension Professionals pressed the government to ensure retirement CDC and guided retirement options were aligned.

PMI chief strategy officer Helen Forrest Hall said: “We fully recognise the potential of CDC to deliver more stable incomes in retirement. However, success depends on proportionate regulation, trustee confidence, and informed member choice.

“We urge the government to revisit restrictions on member marketing, address concerns around irrevocable defaults, and ensure retirement CDC is integrated into the wider guided retirement framework. With careful design and a level playing field, CDC can become a trusted and valuable part of the UK pensions landscape.

“We welcome the pensions roadmap, but rollout for guided retirement and CDC should follow reforms like small pot consolidation and scale requirements – giving schemes time to pilot solutions and work with regulators to deliver better defaults and improve DC adequacy.”

No guarantees

The Association of Member-Nominated Trustees (AMNT) also welcomed the consultation and said the creation of retirement CDC schemes could be important to millions of UK pensioners. However, it noted since these schemes are new, confidence in them could be boosted if they were introduced as part of guided retirement options or through agreements with existing scheme trustees.

The association stated members could be provided with additional reassurance if they were involved directly in the governance arrangements of retirement CDC schemes, since employers would no longer have an ongoing stake. As part of this process, it noted mechanisms should be introduced from the start to ensure quotations are accurate and “not misleading”.

AMNT co-chair John Flynn said: “Since there are no guarantees in CDC any benefit illustrations need to be very carefully annotated with the assumptions used. Ideally, a standard calculation method for future illustrations should be developed, perhaps to be used alongside some previous history data in comparison. The truth, the whole truth and nothing but the truth would be a good place to start.”

The association added while retirement CDC may be a suitable option for certain members, some individuals may prefer alternative approaches, and consequently, the government should ensure enrolment into a retirement CDC scheme includes the ability to opt out “at the outset”.

Clarity needed

In its response to the consultation, the Pensions Administration Standards Association (PASA) agreed with the PMI that retirement CDC has the potential to “transform” outcomes, especially for DC savers who may not be able to make “complex” retirement decisions.

The organisation said trustees acting as intermediaries between retirement CDC schemes and members will need support to balance new duties with their existing responsibilities as implementation of retirement CDC will require “significant” resources and “careful” sequencing. It added administration will be key to the success of retirement CDC.

PASA’s response said: “Systems must integrate tightly with actuarial, investment and communication functions, with real-time pricing and record-keeping ensuring fairness and sustainability. Clarity is needed on minimum transfer pot sizes, combining multiple DC pots and rules for subsequent transfers to avoid uncertainty.

“Administrators should be involved early in designing the saver journey and communications, while restrictions on trustee communications must be clearly defined to avoid reputational risk. Costs must be controlled to protect savers, but flexibility is needed rather than a universal cap. Good standards of administration and governance will underpin confidence in retirement CDC.”

Moving parts

Sackers partner Helen Ball said the introduction of retirement CDC formed a “pivotal” part of the government’s pension reforms for DC schemes but noted there are a lot of “moving parts” which could hinder the chances of retirement CDC being successful.

She said: “We do have some reservations about the proposed sequencing and whether this might hamper their effectiveness. If guided retirement is introduced before retirement CDC schemes become available, the government might miss its best opportunity here, as it may then be too late for CDC schemes to take off if alternative default retirement solutions have already been chosen.

“There could also be challenges partnering with retirement CDC schemes to create a default retirement solution if trustees can’t show that it will offer members better outcomes compared to any other solution they could design and implement themselves. This could give rise to difficulties where a retirement CDC scheme has little to no proven track record.

“We would encourage the government to look again at its timetable to allow opportunity for retirement CDC schemes to be established before trustees are required to choose and offer a default retirement solution. This will ensure that members can benefit from the full suite of options.”

Further exploration needed

Aegon pensions director Steven Cameron warned retirement CDC warrants “further exploration and analysis” as it is an “unproven” concept.

“It is a highly complex innovation and needs substantially more thought before it can be safely offered within the wider pensions market. Trustees and scheme providers will also need to build full confidence before offering it to members.”

He added: “While there have been various claims around the likely income from retirement CDC, these are highly dependent on investment strategy and are unproven. We urge the government not to ‘oversell’ the concept to trustees or scheme providers particularly if, as the consultation implies, it sees retirement CDC as a candidate for the Pension Schemes Bill’s default pension benefit solutions.

“If retirement CDC is to be a mass-market solution, it’s imperative that it’s not rushed into, first needing very careful design and delivery. With so many other huge workplace pensions changes being driven by government, there are additional ‘bandwidth’ risks here across much of the industry.”

Source: PP