Rt Hon Frank Field MP, Chair of the Committee, said:
“The idea of a ‘new Beveridge’ has been overused and under-delivered during most of the welfare state’s life. But the report published today by the Select Committee offers that opportunity for pensions: how to combine decades of individual pension ownership and provision with collective security. The report centres on collective defined contribution schemes specifically in relation to the breakthrough at Royal Mail.”
Schemes in decline
Defined benefit (DB) pensions schemes are in decline as employers seek to reduce their exposure to ongoing funding obligations and massive scheme deficits have featured in a series of high-profile corporate failures, including those such as BHS and Carillion that have been investigated by the Committee.
Individual defined contribution (DC) saving is growing fast under automatic enrolment, but while DC pensions are more manageable for employers, they require individual savers to consider how to manage investment and actuarial risk.
CDC pensions by contrast offer advantages in the middle ground. These schemes, which are already prominent features of highly successful pensions systems 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, and gives staff the welcome prospect of a regular income in retirement, managed collectively on behalf of all members. Several studies have shown that CDC schemes could offer more generous and predictable benefits than individual DC provision, through the feature of risk pooling.
Some critics suggest that the collective approach of CDC runs counter to the spirit of pension freedoms, however, it can also be regarded as adding a further attractive pension choice to the mix, potentially providing a further boost to pension saving.
The Government has indicated that it will seek to enable CDC for Royal Mail in a way which will allow other companies to follow suit – the Committee supports this and says Government should set out a swift timetable for enacting CDC schemes in the UK in its response to this report.
The Committee says CDC schemes should:
- be governed by a board of trustees and both authorised and supervised by a proactive Pensions Regulator
- be required to publish their benefit calculation rules and funding position and strategy at least annually
As part of setting up the UK’s first CDC schemes, Government should also consult on:
- benefit adjustment and risk sharing policies, including how to achieve intergenerational fairness within CDC schemes;
- the regime for transfers out of CDC, including whether they should be permitted once pensions are in payment and whether members transferring out should have to take financial advice; and
- whether CDC scheme trustees should be required to have a specific qualification.
A new system of CDC schemes opens the possibility of more diverse and ambitious provision of collective pensions, across industries and professions and to self-employed and gig economy workers. The regulations governing CDC should accommodate mutual, multi-employer and standalone schemes.