MPs warned defined ambition won't work with pension freedoms

[TrueBlueTerrier]

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Collective defined contribution (CDC) scheme might not be fit for pension freedoms, Hargreaves Lansdown has warned.


Nathan Long, senior pensions analyst at the company, told the Work & Pensions select committee today (21 February) at a hearing in Parliament that freedom and choice hasn't "been modeled in the work that has been done already" in this field.

Collective defined contribution schemes differ from defined benefit (DB) pensions in the sense they do not guarantee certain incomes in retirement.

Instead, collective defined contribution schemes have a target amount they will pay out, based on a long term, mixed risk investment plan.

These schemes also differ from the traditional defined contribution (DC) plans, since they do not produce individual pension pots.

Instead they invest savings in a larger collective pot, which provides an income to individuals during their retirement.

The Pension Schemes Act 2015 created by the coalition government defined collective defined contribution as a distinct pension category, but secondary legislation to bring them into effect was never introduced.

The committee launched an inquiry on these type of schemes in November, since they have the "potential to address some of the concerns that policy makers and the public have about the current pension offer".

Mr Long said: "Retirement is very personal and people need to make choices that suit their circumstances. Looking at this from a collective defined contribution lens, you need to offer that flexibility, the ability to take lump-sums and to transfer out.

"And if it offers that, the problem will be that people that will transfer out will be those with larger benefit provisions built up, and will also be people who don't expect to live as long on average.

"If those people take their money out, all of the sudden you have this shared pooling of risk in retirement weakened."

After the introduction of pension freedoms in the UK in 2015, the volume of DB pension transfers has soared, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into defined contribution schemes to access their cash.

HM Revenue & Customs data showed more than £14bn has been unlocked from defined contribution pensions since pension freedoms came into effect.

According to Hymans Robertson, around one million individuals will transfer out of their DB pension schemes in the next 25 years.

Hilary Salt, senior actuary at First Actuarial, also present at the hearing, argued there is no technical reason why a CDC member shouldn't be allowed to transfer out.

She said: "In DB scheme transfers, you generally look at the benefits you expect in the future, and then you discount them to now, to work out the transfer value.

"With a CDC arrangement, each person would have a share of the fund, which would be their property right, and they would be entitled at any point to transfer out, even right up to retirement.

"There is absolutely no reason why with a CDC scheme any member shouldn't be allowed to transfer out all or part of their benefits to some other arrangement.

"Clearly, we are talking about something that hasn't been legislated yet, but I certainly imagine legislation would allow that."

The Department for Work & Pensions (DWP) is currently working with Royal Mail on what would be needed to introduce a CDC scheme.

The postal company will close its defined benefit (DB) pension fund to future accrual on 31 March, after it reached an agreement in principle with its trade union in February to create this specific type of pension fund.

[nataddick]

I watched the Parliament live tv with great interest and learnt a great deal about joint RM/CWU Pension ‘in principle’ agreement. I am already in receipt of my NRA 60 benefits and would echo Nathan Long’s views about reconciling the CDC solution with the pension freedoms.

I want to exercise control over the timing of my RM retirement and in doing so, make a choice on the acceptable level of combined guaranteed/non-guaranted retirement income that I will receive, in order to make an informed decision.

The current WINR’s proposal is actually very different from the one the CWU campaigned on. It is no longer a career average DB, no longer 1/60th accrual and no longer 17.6% employer contribution rate. No longer State Pension Age but fixed 67?

It seems to me, that the CWU and RM have now colluded in designing the new CDC scheme options to ‘skew’ employee options by NOT offering the same definition of pensionable pay and level of employee contributions for both DC and CDC pensions. They have also failed to include all existing DC members, other than those who have paid the ‘standard’ contribution for the requisite qualifying period. How many of the 42,000 fall in this category? Length of service and previous contribution rates really should not be a constraint on membership. Cost inevitably is, and so let’s elect a prohibitive barrier ?

I really struggle to understand how the CWU can honestly argue that the latest pension proposal offers an equitable pension solution for all, that also embraces the new welcome, pensions freedom. Do the CWU not understand that RMPP members, particularly those close to retirement who have an array of health/financial/personal circumstances, want freedom of choice when it comes to their retirement options ?

The Goverment are currently consulting on bringing forward the implementation date for the State Pension Age to increase from 67 to 68 from 2037 - so I can foresee the CDC retirement age being permanently aligned to it. I stand to be corrected !

I await the latest booklet for explanatory details on the new scheme arrangements but honestly feel that the CWU have failed to address how the CDC matches the ambitions of members in the over 55 age category, that may want to maximise pension benefits and also enjoy the new pension freedoms.

[RobertT]

It seems to me that with the new CDC scheme and the DBCBS to some degree, the CWU and RM are trying to make our decisions for us, and I do think in many cases the ‘wage in retirement’ the CDC scheme is aiming for will be better for most people than DC. The problem is that a DC option with the same contribution level was previously on offer, but has now been taken off the table, which leaves those who wanted the flexibility of DC let down.

Although, how many of those people would have considered a DC scheme and the freedoms associated with it had the RMPP not been closing to future accrual?

The government has already consulted on bringing the state pension age from 67 to 68 forward and its implementation is pending parliamentary agreement. Anyone born between 6th April 1970 and 5th April 1978 will be affected by that. Details here.

I see no reason why the NRA of the CDC scheme would be aligned to state pension age from 68, when they’ve specifically changed from SPA(WinRS) to a fixed NRA of 67(CDC). That to me doesn’t make any sense.

In practice I think an NRA of 67 is probably to the detriment of those who reach SPA before then and to the advantage of those who reach that milestone afterwards.

[fishtank]

And if it offers that, the problem will be that people that will transfer out will be those with larger benefit provisions built up, and will also be people who don't expect to live as long on average.

I think a bigger danger could be a sudden or sustained lack of confidence in the scheme's viability or effectiveness causing a "bank run" style evacuation of funds.

If pension freedoms are applied i think in order to protect against this trustees will be nervous and keep returns to a minimum even when plan investment returns are high trying to build up a surplus buffer. The problem with this policy from our point of view is that it means you're investing in a relatively high risk manner but not seeing the benefit of that risk. You would be better off in bonds.

[vmaxv4]

If pension freedoms are applied i think in order to protect against this trustees will be nervous and keep returns to a minimum even when plan investment returns are high trying to build up a surplus buffer.

At at select committee hearing last week, Hilary Salt stated as a matter of her expertise on CDC schemes that at a default level that NO surplus would be tolerated as this would lead to existing & forthcoming pensions would loose out.
But I take the point/view that as trustees will be trustees an inevitable approach of “ saving for a rainy day” scenario might gain traction.

[Celgar]

Anyone know if this parliamentary debate is available to view on the BBC IPlayer ? It would have been handy if RM or the union let employees know when the debate was going to take place beforehand.