MPs support CDC development, call for DWP to scrap statement season – DB & Derisking

In the document published on Tuesday, the MPs made a number of recommendations in other areas, such as increasing uptake of Pension Wise guidance by trialling automatic appointments, establishing equivalent investment pathways for trust-based schemes, and prohibiting transactions being made on pensions dashboards until they are well-established and trusted.

The report dedicates significant time to a discussion of CDC schemes, the first of which — Royal Mail — is expected to launch this year.

The committee listed several of the advantages of these pension funds, such as longevity risk-sharing, greater investment scale, longer-term risk-seeking investment strategies, and pensions provision that is not contingent on an employer’s ability to fund it.

The report suggested that the Royal Mail scheme should be used to set an example and establish best practice. Angela Gough, head of corporate pensions at Royal Mail, told the committee that modelling suggested benefits under the Royal Mail CDC scheme would be 20 per cent higher than in a defined contribution scheme with the same contributions.

It also discussed the possibility of establishing decumulation-only CDC schemes, which Laurie Edmans, commissioner at the Financial Inclusion Commission, told the committee could provide an alternative to annuities and drawdowns. However, the government said that it did not intend to allow these under initial regulations.

The Department for Work and Pensions stated: “We look forward to opening up [CDC] provision to a broader range of models in the near future when aspiring market participants have further developed their product designs.

“The 2021 Act contains powers to make secondary legislation to facilitate a wider range of [CDC] scheme designs in due course, building on the learning from this initial tranche of single or connected multi-employer schemes.”

The committee also discussed whether master trusts would be the best vehicle to provide multi-employer CDC schemes, and whether they could become the default decumulation vehicle for people with DC pensions.

Opperman has previously confirmed that work is being done on regulations to enable the creation of multi-employer CDC schemes, but that these are unlikely to emerge before summer 2023.

In the interim, the committee recommended “that the Pensions Regulator works with Royal Mail to develop a toolkit for other employers looking to set up similar schemes”.

It also recommended “that the Financial Conduct Authority considers whether there is also a case for developing contract-based CDC schemes and publish its findings”.

Drop the statement season

The report did not look favourably on the proposed introduction of a “statement season”, despite Opperman’s several interventions in its favour.

As Pensions Expert reported in August, the idea behind the statement season is to set aside a specific time each year in which all members would receive their statements. 

Opperman previously told a Work and Pensions Committee hearing that the goal was that “we would have a situation when people would meet in a pub and go ‘I’ve got my statement. Do you understand yours?’”

The industry has never been keen on the idea, however. PensionBee warned in November that more than 10m members could be put at risk of fraud should the proposals come into force, while in September the Pensions Administration and Standards Association cited “significant difficulties, additional and unnecessary costs, and adverse implications” a statement season could entail.

Despite Opperman’s defence of the concept, the committee sided with his industry critics.

“We are not convinced that the gains from a statement season will justify the complexity of introducing it,” its report stated. 

“In our view, the measure is at best a stopgap until pensions dashboards are available. Given the likely cost and disruption to the industry, we recommend that the government be prepared to adapt or drop its proposal for a pension statement season if the benefits cannot be robustly demonstrated.”

Decoupling tax-free cash should be tested

Elsewhere, the committee weighed up the benefits of decoupling the 25 per cent tax-free lump sum from the rest of an individual’s pension.

Currently, savers can usually take up to 25 per cent of their pension as a tax-free lump sum, while income tax is paid on the remaining 75 per cent. 

“This is one of the most well-known UK pension policies and we were told that many people accessing their pensions for the first time are solely focused on accessing the 25 per cent which is tax-free,” the report stated.

“We heard from some witnesses that ‘decoupling’ the 25 per cent of a pension which is tax-free from the rest of the pot would prevent people defaulting into decisions against their best interest.”

Matthew Arends, head of UK retirement policy at Aon, cautioned that such a move could have unintended consequences, such as encouraging people to take more of their savings than they need.

The report recommended that regulators “should carry out a scoping exercise to establish the research and testing, which could be undertaken on decoupling the 25 per cent of a pension pot that is tax-free from the rest of the pot and present their findings to our committee”.

Laura Myers, partner and head of DC at LCP, who favours the move, said: “Decoupling taking tax-free cash from accessing the rest of the pension pot would help savers make much better use of their hard-earned savings. I’m delighted to see that the select committee has responded positively to this suggestion, and call on the government to do the necessary work to see how this change could be implemented in practice.” 

Govt told to trial Pension Wise auto-appointments

Further divergence with Opperman’s views was evidenced when the committee considered the merits of automatic appointments with Pension Wise.

Though both the committee and the government are of the view that uptake should be increased, the minister wrote to committee chair Stephen Timms last week ruling out the prospect of automatic appointments for 50-year-olds on the grounds that such a policy would be expensive and ineffective.

The DWP had produced illustrative estimates suggesting that the cost could be between £45m and £80m a year, he said.

Although Pensions Expert reported in September on industry concerns over the suggestion, not least that it may produce unintended consequences and could worsen value for members, the committee cited “significant support” for automatic Pension Wise appointments.

It recommended that the government sets a target of 60 per cent uptake of Pension Wise guidance, and conducts two trials of automatic appointments, “one with an appointment when a person accesses their pension for the first time, and another at the age of 50 before they can access their pension savings”.

Don’t rush dashboards

Finally, the committee urged caution when considering pensions dashboards. It said that its introduction could potentially be “the most influential policy in helping people take good decisions when they first access their pension pots”, but added that it represented a “huge undertaking” and must not be undermined by “bad data” — which it said had happened “too often” with pension policy.

Noting that some in the industry are keen that transactions be possible via the dashboards, the committee said that “with dashboards a long way from reality and a need to build trust in the system, we recommend that no consideration is given to allowing transactions through dashboards until they are well established”.

It also recommended that the Money and Pensions Service should produce a “guidance service”, possibly through the “midlife MOT”, to support savers “by using the data available through their pensions dashboards”.

“It is important that these services are considered now before dashboards are launched,” the committee added.