How joined up pension regulation can get CDC done

In pursuit of getting innovation over the line, I may have implied that the “retail CDC” product is the responsibility of the FCA. This is true , in a narrow sense, just as pooled LDI funds are in the FCA’s regulatory perimeter.

But the impact of any innovation that impacts retirement savings is a matter for the Pensions Minister , her department and her regulator – the Pensions Regulator.

So while a CDC fund would be a UCIT and a permitted link., its impact on the outcomes of members of occupational pension schemes , falls within the Pension Regulator’s perimeter.

So it’s entirely right that the consultation that we hope to see early next year on retirement income, involves both regulators and is focussed on the saver’s experience.

The important consideration here is that the saver does not choose to be a member of an occupational pension scheme or a workplace GPP, the saver’s regulator is a matter of choice for an employer but most employers do not make a conscious decision about regulatory governance.

The saver and to some extent the employer is expecting a comparable experience whatever their choice, this includes tax treatment (hence we call the net pay issue an “anomaly”. It includes the application of the auto-enrolment regulations which are apply for occupational and group personal pensions equally.

This article suggests that it is not the CDC regulations and code that retail CDC needs be concerned with but with those of auto-enrolment.

Why is at retirement different?

While we have consistent regulations for the savings element of auto-enrolment , the “at retirement” choice architecture presented to you if in an occupational or personal pension is radically different. Trustees choose the options you receive and have few obligations other than to make you aware of Pension Wise. They are helped by  the guidance of the Regulator

145. Where contact is made by either the member or the trustee board about what the member may do with their flexible benefits, the trustee board may have the option to provide the information about Pension Wise (and any additional statements where required) verbally unless requested in writing[67]. However, whatever the format used, we expect all communications issued to members about their retirement options to clearly set out the steps a member should consider taking in order to help them make an informed decision about their benefits [GUIDE].

Personal Pensions have the investment pathways and the regime of wake up packs. There are clear obligations , prescribed and immutable.

It really makes no sense that savers are treated in quite different ways when they arrive at retirement – depending on which type of workplace pension they are in. It does not make sense for the FCA and TPR to regulate in different ways. We must put aside legalistic differences in trust and contract law and focus on the saver.

And how do we move forward?

The clear direction of travel in the regulation of mass market non advised pensions is towards defaults, The FCA are looking to introduce defaults into the accumulation of savings within a non-workplace pension.

The spending of the pot is not however covered by the rules covering auto-enrolment and is therefore left to the saver – though the investment pathways is a first stab at creating some order out of pension freedoms.

There are two ways of simplifying choice using defaults, there is the strong nudge,  where you are guided to a default option – along the lines  proposed by the PLSA in its final recommendations for DC decumulation. We could call it the opt-in model.

The other way is to set a hard-stop for indecision, perhaps state retirement age and require those who have made no decision by then to start drawing a pension via CDC. This is the opt-out model.

the call from Eversheds’ Michael Jones, in a recent article on retail CDC is that

the government should consider wholesale changes to the legislative framework to enable default drawdown and CDC products

The legislative framework in question is either the auto-enrolment regulations – effectively this would extend the use of defaults into retirement , or it is the rules governing pension taxation, which gave us pension freedoms. There needs to be changes to both auto-enrolment and pension taxation to move forward but we need to be clear about the purpose of change.

To me – the purpose of any pension system is the common purpose established in Australia which provides dignity in retirement through an income that is paid as long as it is needed.

The common purpose needs to apply equally for contract and trust based plans. There also needs to be equivalence between the treatment of workplace and non-workplace plans. The choice architecture, and the use of hard and soft defaults need to be simplified so that savers get an equivalent experience whatever part of the regulatory eco-system, their pension savings are in.

Any change needs to be justified with reference to a common purpose such as that established in Australia.

Simplification means harmonisation

Simplification and harmonisation are easy to talk about but hard to do. In order to get to a simple , harmonised system for savers looking to turn pots to pensions, we must agree on a single solution going forwards.

It is clear that most people in pensions consider flexi- access – drawdown, the de facto default. The reality is that most pots that are held by people past the normal minimum retirement date have either been cashed out or remain untouched. Drawdown is the default solution for those who don’t choose an annuity – but since the majority of drawdown is unadvised, there is no consistency in its application. Drawdown does not meet the definition of common purpose , it is not a pension.

Here CDC can help. Michael Jones’ article talks of

an initial conversion rate of DC to CDC which balances attractiveness with a sufficient level of prudence

Such a conversion rate could be determined by the regulators and could be a requirement of CDC schemes (so that they did not use an attractive rate to win business).

This may smack of unnecessary governmental intervention that flies in the face of pension freedom but we have been happy to accept this kind of intervention through the auto-enrolment regulations and especially the charge cap.

We can only achieve simplification and harmonisation in the way we turn pots to pension if we recognise that most people want something that is done for them, gives them a better income than from an annuity and ensures that income lasts as long as they do. That to me is the common purpose that drives simplification and harmonisation.

We are slowly coming to the conclusion that the only pension pathway that has the capability of standardising , simplifying and harmonising  – is CDC. It will take both the Pensions Regulator and the FCA to agree and it will need the blessing of both the Treasury and the DWP, but this is a positive way forward for Government that should become  its pension priority.

With joined up pension regulation we can get things done



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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