What could the future hold? A look at CDC...

[RobertT]

Not specific to the planned RM scheme, but might be of interest.....

https://www.lexology.com/library/detail ... 7d575fbc23

As well as introducing new powers for The Pensions Regulator, the Pension Schemes Act 2021 introduced a framework for a completely new type of occupational pension scheme in the UK: collective money purchase/DC schemes, commonly referred to as “CDC” schemes. Similar forms of CDC scheme already exist in the Netherlands, Denmark and Germany, but would be a marked change in how pensions are provided by employers in the UK. Royal Mail is expected to be the pioneer in developing and implementing a CDC scheme.

Whilst much of the detail remains to be confirmed in future regulations, in this Law-Now we’ll take a look at the idea, what these schemes will look like and how they will be funded, authorised and taxed. We would also like to encourage you to take part in the Royal Society for Arts’ CDC survey which is aiming to gather views on what CDC could offer in the UK. You can access the survey by clicking here.

A new idea

The idea behind a CDC scheme is that whilst members are building up benefits the contributions are defined – like a normal DC scheme. However, by pooling assets and liabilities the scheme offers members a target defined benefit which is paid from the scheme when the member retires. This should result in a smoothing of market volatility.

Unlike a standard DB pension scheme the defined benefit is not guaranteed – it is just a target – and members can receive lower benefits if the funding level does not support the target. The key point from an employer’s perspective is that it has no funding obligation other than for the defined contributions and any expenses it agrees to pay. From a member’s perspective, CDC might be simpler than DC – as no choices about investment or retirement provision will need to be made.

Experience in other countries, as well as the history of our own pensions industry, emphasises the importance of two key elements in a CDC scheme: communication and transparency. Members need to understand that the benefit is only a target. They also need to be able to see clearly how benefits are calculated each year, and how they are adjusted year to year to reflect the scheme’s funding level.

CDC’s potential

One current restriction for CDC schemes is that they need to be an occupational pension scheme in which only connected employers participate – so not a master trust for unconnected employers. Given the costs to set up a new CDC scheme, meet running costs and gain authorisation from TPR it seems likely that multi-employer CDC schemes will need to be permitted in order for CDC to become a success. This would allow groups of unconnected employers to participate in the same CDC scheme, making CDC schemes more accessible to employers with small to medium workforces.

Another area of potential for CDC schemes is as a post retirement vehicle. CDC offers a possible middle ground between a guaranteed annuity, where the guarantee comes at a material cost to the member, and drawdown where the member has to carefully manage their investments and their withdrawals so that they do not run out of money. CDC offers the prospect of higher income than an annuity and a less stressful financial retirement than drawdown, provided members are willing to accept that there are winners and losers when mortality risk is shared and that there are no guarantees.

Authorisation and funding

A CDC scheme must be authorised by TPR before it can be operated. Whilst we don’t have the detail for the authorisation process yet, the key requirements for authorisation are set out in the Act and, unsurprisingly, are similar to the requirements under the DC master trust authorisation regime.

Following an application for authorisation TPR will have six months to make a decision and will need to consider a number of factors including the following requirements:

Fit and proper persons: founders, trustees and those with power to remove and appoint trustees must be fit and proper.

Sound scheme design: trustees will need to prepare a “viability report” and obtain scheme actuary certification.

Financial sustainability: the scheme must have sufficient financial resources to meet the costs of setting up and running the scheme, including being able to run the scheme on for up to 2 years following a “triggering event”.

Adequate systems and processes for communicating with members: as the benefit structure is completely new there is going to be a focus on ensuring that members of CDC schemes understand the target nature of the benefits.

Effective operation: which will need to cover IT systems and risk management processes.

Continuity strategy: a plan for how members’ interests will be looked after if a “triggering event” occurs.

Trustees will need to obtain actuarial valuations at one-year intervals. The big difference between the funding of CDC and DB pension schemes is that, in a CDC scheme, if a valuation shows that it is underfunded, it is the benefits which are to be adjusted. There is no obligation on the employer or the members to top up the funding if the CDC scheme is underfunded, as increases to pensions and other benefits are not guaranteed (but will depend on the funding of the scheme).

TPR supervision

In addition to authorising CDC schemes, TPR will gain a range of new powers in relation to them including:

Directing trustees to obtain an actuarial valuation or to adjust benefits in accordance with their scheme rules.

Issuing risk notices to trustees where TPR is concerned that they may breach the authorisation criteria.

Requiring notification of “significant events” affecting the scheme.

Triggering events

The Act contains a list of “triggering events” which result in various consequences for CDC schemes. Examples include the insolvency of an employer, the start of wind-up for the scheme and a notice from TPR that it is withdrawing authorisation.

Where a triggering event occurs, trustees are required to pursue one of the following three continuity options and to produce an implementation strategy to be approved by TPR. In some cases, for example if authorisation is withdrawn, there is no choice and the trustees must follow the first option:

Discharge the liabilities by transferring the value of members’ rights to another scheme (including a DC master trust) or securing those rights with an insurer and then winding-up the scheme.

Resolving the triggering event, in which case the trustees must notify TPR that it is satisfied with that resolution.

Conversion to a closed scheme.

RSA CDC Forum

CMS is a founding member of the Royal Society for Arts’ CDC Forum which is researching support in the market for CDC schemes, including multi-employer schemes and the use of CDC schemes as a post retirement pension vehicle. If the research shows there is sufficient market interest, it will help encourage the government to remove some of the current restrictions.

The Royal Society for Arts’ is currently conducting a survey across the pensions industry, asking participants what they know about CDC pensions, whether it is of any interest to them, and if so in what form. The survey takes 5 to 10 minutes to complete and will close on 31st May 2021. You can access the survey by clicking here.

[2yearpostie]

In English then, im putting money in, but in 30 years time I might not get anything out?

[RobertT]

In English then, im putting money in, but in 30 years time I might not get anything out?

There's nothing certain in this world except death and taxes.

The idea that you might not get anything at all out of CDC is a bit far fetched, but any investment has it's risks whether that's equities, property, bonds, gold, etc.

Pensions are no different. Even so called gold plated final salary schemes aren't always 100% guaranteed.

[NWpostie]

There is that, in the meantime I'm still banging in as much as I can toward my AVC while they are sorting out the implementation date.

I have 6 years and few months to go, how much I will benefit is something I would like to know.

[renrag40]

I thought the above article was very useful. It articulates some of the major concerns with the proposed scheme.
It has, for the beneficiaries of the scheme the novel and at the same time unpalatable ability to pool all contributions without building up a buffer to allow smoothing when returns to the fund have been poor in any particular year......Thereby leading to a cut in pensions to those receiving them and a cut in accrued benefits to those still contributing....... and most will still be contributing for an extra 2 years because the nra is 67 for the proposed scheme.
So wait long to get it and don’t bother doing any long term financial planning on the basis of it because you won’t know what you are getting from one year to the next.
Given the secondary legislation and regulatory hurdles that still have to be crossed my long held belief that the proposed scheme will not start until April 2022 at the earliest is beginning to look on the optimistic side.
But then again the long it takes to come in the better as far as I’m concerned...... at least with the interim scheme I will get the money at 65 and not have to wait until I am 67.

[vmaxv4]

I thought the above article was very useful. It articulates some of the major concerns with the proposed scheme.
It has, for the beneficiaries of the scheme the novel and at the same time unpalatable ability to pool all contributions without building up a buffer to allow smoothing when returns to the fund have been poor in any particular year......Thereby leading to a cut in pensions to those receiving them and a cut in accrued benefits to those still contributing....... and most will still be contributing for an extra 2 years because the nra is 67 for the proposed scheme.
So wait long to get it and don’t bother doing any long term financial planning on the basis of it because you won’t know what you are getting from one year to the next.
Given the secondary legislation and regulatory hurdles that still have to be crossed my long held belief that the proposed scheme will not start until April 2022 at the earliest is beginning to look on the optimistic side.
But then again the long it takes to come in the better as far as I’m concerned...... at least with the interim scheme I will get the money at 65 and not have to wait until I am 67.

Agree with the timing at the earliest will be April 2022.

[RobertT]

I have 6 years and few months to go, how much I will benefit is something I would like to know.

With an accrual rate of 1/80ths of pensionable pay for the pension and 3/80ths for the lump sum along with annual RPI increases, it's not too difficult to come up with rough figures for what you should get from CDC/DBLSS. Although there are obviously variables that we don't know in advance, such as inflation and future pay rates.

But with CDC benefits only being targetted, it's impossible to be accurate.

Agree with the timing at the earliest will be April 2022.

It's already taken longer than most people expected.

The latest I heard from Terry Pullinger was they were 'hoping for the end of 2021, but it could creep into 2022'.
While RM last said they were hoping for implementation 'in the second half of the current tax year'.

We'll just have to wait and see!

[freespeech]

I was thinking about this.......I'm currently 55 and intend to retire within the next three years so I will only have a likely max of two years in the new scheme. In terms of value for money I assume it's still likely to give me the best return given the business will be contributing 16%?

[Woody Guthrie]

I was thinking about this.......I'm currently 55 and intend to retire within the next three years so I will only have a likely max of two years in the new scheme. In terms of value for money I assume it's still likely to give me the best return given the business will be contributing 16%?

Over the long term in pure numbers yes but to be honest the length of time you'll be paying in is so short that it's not really going to provide a meaningful return.

It might buy you a takeaway every month for life and that might make you smile. . Some would suggest that you would be better off just saving that money for 3 years and having a celebration holiday when you retire, it's horses for courses.

[RobertT]

I was thinking about this.......I'm currently 55 and intend to retire within the next three years so I will only have a likely max of two years in the new scheme. In terms of value for money I assume it's still likely to give me the best return given the business will be contributing 16%?

I'm in a similar position as I intend to leave RM in about 2 years time(I haven't ruled out going sooner), so I don't expect to get more than a year or so worth of CDC benefits.

Based purely on my current basic full time pay of £458 per week, 1 years CDC membership would give me an annual pension of about £300 and a lump sum of £900 at age 67, not factoring in any increases or decreases.

When considering the benefit of tax relief and PSE, my 1 year of contributions would total £970, and that's how much I'd have in my pocket if I didn't join the scheme.

So joining is a no-brainer really, as the lump sum would give me back most of my net contributions, with the pension being 'profit' for the rest of my life. But with the obvious drawback of having to wait until 67 or face an early payment reduction.

Plus there is expected to be the option to transfer out into an individual DC scheme, which would potentially provide a much bigger pot for that celebration holiday and from age 55 too! Obviously depending on how you choose to access it, tax implications, etc.

The general rule, allowing for individual circumstances, is always to join a company pension scheme and pay in whatever it takes to get the maximum employer contribution. So generally, I don't really see why that would be any different with CDC.

*Unless something changes, RM's contribution will be 13.6%.