A] Prelude
For more information on pension systems, risk and coverage, feel free to visit our dedicated webpages:
https://expatpensionholland.nl/uk-expat-pensions
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https://expatpensionholland.nl/global-investments-risks-0
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For even more information feel free to visit the following external sites:
https://www.gov.uk/government/consultations/retirement-collective-defined-contribution-pension-schemes/retirement-collective-defined-contribution-pension-schemes
https://commonslibrary.parliament.uk/research-briefings/cbp-8674/
B] The Issue
UK Industry bodies have warned that benefit illustrations for retirement collective defined contribution (CDC) plans must be accurate and not misleading, as concerns grow about the final details of the regime.The government recently launched a consultation retirement CDC, which would allow people who have saved into a defined contribution (DC) scheme to transfer their pension pot into a CDC scheme at retirement.
Industry experts have warned that the framework must dovetail with the forthcoming guided retirement duty and avoid creating default pathways before retirement CDC schemes are available. The Association of Member Nominated Trustees (AMNT) said it “strongly welcomes” the consultation but stressed that confidence in retirement CDC will depend on clear governance and accurate benefit projections.
Indeed, AMNT co-chair, John Flynn, warned that any benefit illustrations must be “accurate and not misleading”, calling for a standard method for producing future illustrations and consistent annotation of assumptions. “Since there are no guarantees in CDC, any benefit illustrations need to be very carefully annotated with the assumptions used. “The truth, the whole truth and nothing but the truth would be a good place to start,” stated Flynn.
C] Options
While he emphasised the value of retirement CDC for DC savers who stand to benefit from investment and longevity risk pooling, Flynn said any model must include the ability to opt out. He also stressed that communications within retirement CDC must explain risks, benefits and alternative pathways, and suggested that an independent body, such as the Money and Pensions Service (Maps), produce impartial material to avoid the influence of marketing.
Echoing this, the Investing and Saving Alliance (TISA) welcomed the addition of CDC within guided retirement but emphasised that it must be built on “fairness, transparency and genuine choice”. TISA head of policy for retirement and products, Renny Biggins, warned that retirement CDC is a “one-way decision” for many savers and stressed that consumers must fully understand the risks before entering the arrangement.
D] Results
He cautioned that claims of enhanced returns over annuity or drawdown are not guaranteed and are contradicted by some independent evidence. In addition, TISA urged clarity on how actuarial fairness will be achieved without underwriting, arguing that members in poorer health risk subsidise healthier cohorts. Biggins also stressed that schemes must not be pressured to adopt retirement CDC as a default and said investment strategies should be aligned with the target market identified by trustees and independent governance committees.
E] Timeline
Highlighting other concerns, Sackers partner, Helen Ball, warned that trustees may struggle to justify selecting an untested retirement CDC partner without evidence that it will deliver better outcomes than models they could construct themselves. Therefore, she urged the government to revisit its timetable to allow schemes to be established before trustees must select a default retirement solution.
Meanwhile, the Pensions Management Institute (PMI) reiterated that informed member choice was “essential” to successful implementation. With this in mind, PMI chief strategy officer, Helen Forrest Hall, argued that the restrictions on member marketing should be revisited and the risks associated with irrevocable defaults addressed.
She also asked for retirement CDC to be fully integrated with guided retirement duty, and said wider reforms, including small pot consolidation and scale requirements, should be prioritised before rollout to give schemes time to pilot solutions and engage with regulators.
F] Finally
The Pensions Administration Standards Association (PASA) has also backed the extension of CDC into the retirement phase, but warned that administration will ultimately determine how well the model works in practice. PASA suggested that trustees will need support to navigate new duties and emphasised that implementation will require substantial resources and careful sequencing.