CDC schemes set to report on their ‘ongoing viability’

The government’s response to the fourth recommendation of the Work and Pension Committees’ (WPC)  24 design reforms laid down in January – published yesterday (27 April) – addressed the question of whether it would publish a framework for assessing the success of the Royal Mail CDC scheme and other early schemes.

It said it had “made it clear” to the industry that it would monitor the operation of early schemes along with The Pensions Regulator (TPR). The response outlined that this would consist of considering the performance of these schemes, their effectiveness at providing pension incomes, and any equality considerations identified.

“This will enable TPR to assess a scheme’s ability to provide the level of income it aspires to on an on-going basis,” it’s WPC response stated. “We also plan on engaging proactively with employers, workforce representatives and schemes to identify any issues they are having around the new CDC regime as it beds in and seek views from schemes and the regulator to provide assurance on the effectiveness of the authorisation framework.”

It comes after TPR’s January confirmation that trustees will be able to apply for authorisation to operate a CDC scheme from August.

Pensions and financial inclusion minister Guy Opperman last month said the DWP would consult on “a package of prospective design principles” to accommodate new types of CDC schemes later this year.

Calls for a toolkit

The fifth recommendation from the WPC asked for TPR to work with Royal Mail to develop a toolkit for prospective employers looking to set up similar schemes.

While the government confirmed the regulator would supply more guidance to support trustees, it said its code of practice “could also be used by employers and their advisers in understanding the requirements of setting up a CDC scheme” and a further accompanying toolkit would “not be able to go any further”.

CDC v annuities

The sixth recommendation from the WPC to the government was for CDC schemes “to provide a realistic alternative to annuities”.

“People with defined contribution pension pots need the option to be able to transfer to decumulation only CDC schemes,” the WPC stressed. “In future these may be available through master trusts regulated by TPR.”

Contract-based CDC

The Financial Conduct Authority (FCA) was also recommended to consider whether there is also a case for developing contract-based CDC schemes.

In its own response to the WPC, also released yesterday, the regulator confirmed it was supportive of CDC and that legislation for multi-employer schemes could open the door to firms under its remit operating trust-based schemes, similar to how some insurers operate master trustees.

“Given this early stage of implementation of CDC schemes in the UK, we are not yet able to determine the prospective level of demand for contract-based CDC schemes regulated by us,” the FCA stated. “This may become clear as the market for these through master trusts develops.”

If pans were laid for a regulatory framework for contract-based CDC schemes, the FCA said  = decumulation-only CDC schemes “would need to be confident of a future flow of business to get to scale”.

It concluded: “A more natural progression might be for an established commercial CDC scheme to open its proposition to decumulation-only clients.”

This story is part of Professional Pensions’ ‘WPC reforms‘ series.

See more: WPC automation proposal for Pension Wise rejected