CDC schemes 'must be explicit about potential risks'

[RobertT]

https://www.professionalpensions.com/ne ... -risks-ppi

CDC schemes 'must be explicit about potential risks', PPI says

A warning from the Pensions Policy Institute and a view from Royal Mail

Collective defined contribution (CDC) schemes must clearly communicate to members how the model may put their income and benefits at risk of reduction, the Pensions Policy Institute (PPI) says.
In a briefing note published yesterday (14 June) the institute compared CDC models in the Netherlands, Denmark and Canada with plans for the introduction of CDC in the UK from this August, including a particular focus on the need for transparent and comprehensive member communications.

The PPI warned that "the extent to which communications are effective" within CDC schemes was likely to inform the level of trusts members hold within the scheme overall.

Senior policy researcher Lauren Wilkinson said: "Because of the variable nature of benefits within CDC schemes, clear communication and engagement with members is especially important. Communications must ensure that members understand the nature of their income entitlement within the scheme and the possibility that this could be reduced under some circumstances."

Wilkinson added: "Scheme communications will need to be explicit about the potential risks associated with future indexation and benefits, and clearly explain the measures that will be taken by trustees to address any changes in the funding position."

The PPI used the experience of the Netherlands after the global financial crisis to highlight the importance of transparency and the "need for contractual agreements and members' expectations to be fully aligned from the outset".

"A key part of the communication problem in the Netherlands was that employers thought they had entirely fixed costs, as in a traditional individual defined contribution (DC) scheme, while members thought they had a guaranteed level of income, as in a defined benefit (DB) scheme - neither of which was the case," Wilkson wrote in the briefing note.

"Unlike in the UK where CDC schemes will be brand new CDC separate from previous DB schemes, in the Netherlands the transition has been more gradual and less clear, with existing DB schemes increasingly operating as CDC schemes, but in a non‐transparent unpredictable way."

Regulations on communication

Wilkinson added that additional regulation around stipulating standards for communications and risk disclosures to CDC members was "expected in the UK".

At a minimum, the PPI states this is likely to include the following:

The basic scheme information must contain specific information on the CDC scheme design and relevant risk warnings;
A CDC specific annual benefit statement must be provided, including relevant risk warnings and signposting to other useful information; and
Pensioner members must receive annual information in advance of any changes to their expected payments, again with the repeated risk warnings for potential future changes.

Royal Mail focus

While the UK could take many lessons from the way in which CDC schemes have been run overseas, Wilkinson warned it was likely many prospective UK schemes would model their own offering around the much-anticipated Royal Mail Collective Pension Plan (RMCPP).

She added that features of the RMCPP's design - including how valuations and benefit adjustments are made, contribution rates, and benefit accrual - were expected to be "substantially different" to either the Dutch, Danish or Canadian models.

"UK CDC legislation has been structured to some extent around enabling the RMCPP in the first place," Wilkinson noted. "However, the experience of countries with established CDC schemes can still provide some useful insights."

A spokesperson yesterday told PP that Royal Mail agreed with the PPI that communication "is key" under a CDC scheme.

"The nature of the benefits, the specific way in which benefits are calculated from the available assets of the scheme and how risks are shared between the members of the scheme, must be communicated very clearly," they explained. "We have been communicating widely since the beginning to help our workforce understand the concept of CDC through a range of internal communications channels, including our in-house TV programme, magazine and home mailings."

Royal Mail has also carried out workshops and consulted with colleagues, adding: "We will continue with our comprehensive communication plan in the run up to the launch of the scheme and beyond."