DWP consults on plans to extend CDC pension schemes

The Department for Work and Pensions (DWP) has launched a consultation on extending collective defined contribution (CDC) pension schemes to accommodate multi-employer schemes, also look at the potential of CDC as a decumulation only option.

The consultation, which closes on 26 March 2023, includes a policy consultation on a potential CDC policy framework for accommodating whole-life multi-employer occupational pension schemes.

In addition to this, the DWP is looking to explore the ways in which CDC as a decumulation only option might be accommodated.

In CDC pensions, both employers and employees contribute to a collective fund from which individual retirement incomes are drawn, with trustees responsible for ensuring schemes are viable and can meet their legal requirements and commitments.

Although CDC schemes were initially limited to single employer or connected employer set ups, the DWP previously confirmed plans to consult on a measures to accommodate new types of CDC schemes, although this was initially expected to launch in late 2022.

The DWP also previously stated that it was “open to hearing about and having discussions” about the use of CDC at the decumulation stage, suggesting that there is a "lot of support for CDC at decumulation".

Pensions and Lifetime Savings Association (PLSA) head of DC, master trusts and lifetime saving, Alyshia Harrington-Clark, welcomed the consultation, arguing that "CDC schemes have the potential to boost retirement incomes for savers".

"These are complex developments though, with challenges, including fairness between generations and member communications around the variability of benefits," she clarified, "so we look forward to close cooperation between industry and government as we seek overcome these and establish a framework which leads to better retirement outcomes.”

Adding to this, LCP partner, Steven Taylor, stated: “Today’s CDC consultation follows detailed technical discussion with industry over the past year around how to best make CDCs work for multi-employer schemes.

“It is hoped that this will now fast-forward the emergence of a new brand of pension that can provide today’s employees with better expected outcomes than traditional defined contribution schemes.

"In today’s climate the ability of CDC schemes to target full inflation protection could also be a key selling point for members, whilst employers will be attracted by immunisation from future deficits.

“Squaring this circle to ensure good member outcomes means CDC schemes need to invest heavily in equities and other growth areas. This aligns will with the government’s wider objectives, but also makes investment strategy a key focus for scheme designs."

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