MPs back CDC development, call on DWP to scrap reporting season – DB & Derisking
In the paper released on Tuesday, MPs made a number of recommendations in other areas, such as increasing uptake of Pension Wise advice by testing automatic appointments, establishing equivalent investment pathways for trust-based schemes and banning transactions on pension dashboards until they are well-established and trustworthy.
The report devotes considerable time to a discussion of the CDC schemes, the first of which – Royal Mail – is due to launch this year.
The committee listed several of the benefits of these pension funds, such as longevity risk sharing, greater scale of investment, longer-term risk-seeking investment strategies, and retirement benefits that do not not depend on the ability of the employer to finance them.
Given the likely costs and disruption to industry, we recommend that the government be prepared to adapt or abandon its proposal for a pension statement season if the benefits cannot be robustly demonstrated.
The report suggests the Royal Mail program should be used to lead by example and establish best practice. Angela Gough, head of company pensions at Royal Mail, told the committee that modeling suggested benefits under the Royal Mail CDC scheme would be 20% higher than under a defined contribution scheme with the same contributions.
He also discussed the possibility of establishing decumulation-only CDC plans, which Laurie Edmans, commissioner at the Financial Inclusion Commission, told the committee could offer an alternative to annuities and levies. However, the government has said it does not intend to allow them under the initial regulations.
The Department for Work and Pensions said: ‘We look forward to opening [CDC] supply to a wider range of models in the near future when the aspiring market players have developed their product designs.
“The 2021 Act contains powers to pass secondary legislation to facilitate a wider range of [CDC] timely plan designs, building on lessons learned from this initial tranche of single or connected multi-employer plans. »
The committee also discussed whether Master Trusts would be the best vehicle for delivering multi-employer CDC plans and whether they could become the default disbursement vehicle for those receiving DC pensions.
Opperman has previously confirmed that work is underway on regulations to allow for the creation of multi-employer CDC plans, but these are unlikely to see the light of day before the summer of 2023.
In the meantime, the committee recommended ‘that the pensions regulator work with Royal Mail to develop a toolkit for other employers looking to set up similar schemes’.
It also recommended “that the Financial Conduct Authority consider whether there is also a case for developing contract-based CDC systems and publish its findings.”
Ditch the statement season
The report did not look kindly on the proposed introduction of a “reporting season,” despite Opperman’s numerous pleas in favor of it.
As Pensions Expert reported in August, the idea behind statement season is to set aside a specific time each year when all members would receive their statements.
Opperman had previously told a Work and Pensions Committee hearing that the aim was that “we would have a situation where people would meet in a pub and say ‘I have my statement. Do you understand yours? »
The industry was never keen on the idea, however. PensionBee warned in November that more than 10 million members could be put at risk of fraud if the proposals come into force, while in September the Pensions Administration and Standards Association cited “significant difficulties, additional costs and unnecessary and negative implications. train.
Despite Opperman’s defense of the concept, the committee sided with its industry critics.
“We are not convinced that the gains of a reporting season will justify the complexity of its introduction,” its report said.
“In our view, the measure is at best a stopgap until pension dashboards are available. Given the likely cost and disruption to the industry, we recommend that the government be prepared to adapt or abandon its pension statement season proposal if benefits cannot be robustly demonstrated.
The decoupling of zero-rated cash should be tested
Elsewhere, the committee has weighed the benefits of decoupling the tax-free lump sum of 25 per cent from the rest of an individual’s pension.
Currently, savers can generally receive up to 25% of their pension as tax-free capital, while income tax is paid on the remaining 75%.
“This is one of the best-known pension policies in the UK and we have been told that many people entering their pension for the first time are only focused on accessing the 25% which is exempt tax,” the report said.
“Some witnesses told us that ‘decoupling’ the 25% of a tax-free pension from the rest of the pot would prevent people from defaulting on decisions that are not in their best interests.
Matthew Arends, head of UK pension policy at Aon, warned that such a move could have unintended consequences, such as encouraging people to take more of their savings than necessary.
The report recommended that regulators “carry out a scoping exercise to establish research and testing, which might be undertaken on decoupling the 25% of a pension pot that is tax-exempt from the rest of the pot and present their findings. to our committee.
Laura Myers, Partner and Head of DC at LCP, who is supportive of the move, said: “Decoupling the tax-free cash draw from access to the rest of the retirement pot would help savers make better use of their hard-earned savings. I am delighted to see that the select committee 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.
Government says to judge Pension Wise automatic appointments
Another discrepancy with Opperman’s views was highlighted when the committee discussed the merits of automatic appointments with Pension Wise.
Although the committee and the government are of the view that attendance 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 policy would be costly. and inefficient.
The DWP has produced illustrative estimates suggesting the cost could be between £45m and £80m a year, he said.
Although Pensions Expert reported in September on industry concerns over the suggestion, including that it could have unintended consequences and worsen member value, the committee cited “significant support” for pensioners. Pension Wise automatic appointments.
He recommended that the government set a target of 60 per cent uptake of Pension Wise advice and carry out two trials of automatic appointments, “one with an appointment when someone first accesses their pension , and another at age 50 before they can access their retirement savings.
Don’t rush dashboards
Finally, the committee urged caution when reviewing pension dashboards. He said his introduction could potentially be “the most influential policy to help people make good decisions when first accessing their retirement pots”, but added that it represented a “huge undertaking and must not be undermined by “bad data” – which he said had happened “too often” with pensions policy.
Reporting season could wreak havoc on administrators, PASA warns
Creating a reporting season could lead to “significant hardship, additional and unnecessary costs and negative implications” for schemes and administrators if a common assessment route is chosen, the Pensions Administration Standards Association has warned.
Noting that some industry players want transactions to be possible via dashboards, the committee said that “with dashboards far removed from reality and a need to build trust in the system, we recommend against consider authorizing transactions through dashboards. until they are well established.
It also recommended that the Money and Pensions Service produce a “guidance service”, possibly through the “Quarantine MOT”, to support savers “using the data available through their pension dashboards “.
“It is important that these services are considered now before the launch of dashboards,” the committee added.