I’m pleased to see that Stephen Timms and the Work and Pensions Select Committee will be meeting this afternoon (Oct 25th) to take evidence from four notable experts on pensions. The subject discussed will be “CDC pensions”
CDC pension schemes were created by the Government in the Pension Schemes Act 2021 to add to the existing Defined Benefit (DB) or Defined Contribution (DC) schemes that employers are currently able to offer. The session will examine the potential benefits and risks of CDC schemes being used more widely.
You can listen in either on parliamentary TV or watch in person at Room 15 of the Palace of Westminster. When it comes to really learning about a subject , it is hard to beat attending one of these sessions; if you’re going, take your face mask.
Why I’m interested
This call for evidence is part of the WPSC’s three part inquiry
Thinking about the options in those three final bullets, it’s clear that CDC is going to be an option for postal workers but not yet clear that it will be available to anybody else.
The principal risk is of course that CDC fails to deliver on its promise to provide a secure wage for life solution. This is most likely to happen if it is never taken up. There is a secondary risk that it will fail if it is an employer sponsored arrangement and the employer is no longer able to meet its defined contribution obligation. There is a third risk that CDC will fail if the mechanism set up to distribute income fails , either through a failure in the design of the scheme or because the underlying investments fail to deliver sufficient return to meet member’s reasonable expectations.
I expect these risks to be discussed by the notably well qualified panel delivering evidence and the strong line up of MPs asking them.
The MPs asking questions will be drawn from the Committee
- If one of the risks of CDC is the failure of a sponsor’s covenant, can we imagine a CDC scheme that is independent of a sponsor and funded purely from the transfer of existing DC pots? If so, how might this work?
- Were a CDC scheme to operate independently of an employer sponsor, how would it be positioned against the FCA’s investment pathways; might it be a 5th investment pathway?
- Would members be able to transfer their DC savings pots into a CDC scheme without needing to take advice, or would it be better to require advisory clearance as happens with DB transfers?
- What would the impact be on other retirement products such as annuities and SIPPs, if CDC competed for DC saver’s pots?
- What are the risks that would be reduced by offering CDC as a way to spend retirement pots?
- Is there a commercial reason for operating a CDC scheme independently of a sponsor?
- Would a CDC scheme be considered to be a workplace pension if it operated without a sponsor? If not, would it be subject to the charge cap?
- Could a CDC scheme operate on the basis outlined above but sit within a master trust , using the DC savings scheme as a feeder and effectively becoming the master trust’s default spending option?
- Could a CDC scheme in payment offer a transfer value to purchase an annuity or to a SIPP?
- Could such a scheme operate within the occupational pensions framework or would it be considered a “non-workplace” pension scheme? Can we properly describe a non-guaranteed non-sponsored pension scheme such as CDC – a pension or is it a collective with-profits annuity?