Pensions industry representatives have called for alignment between retirement-only collective defined contribution and an incoming requirement to offer default retirement solutions, but some have warned against defaulting people into an option that is irreversible without a cooling off period.

 

A government consultation on introducing CDC that operate as retirement-only schemes closed on Thursday. Several industry organisations have stressed a need to time the introduction of retirement CDC so it becomes an option before a requirement to offer a default solution kicks in, as once trustees have settled on a default, they might not change it anytime soon.  

 

The Society of Pension Professionals was among these. Keith McInally, chair of the SPP’s CDC committee, said: “The SPP is pleased that the government is moving quickly on retirement CDC policy and we very much welcome the policy framework that is being proposed. However, there remains a substantial timing challenge relating to guided retirement. If the government were to introduce their guided retirement requirements on DC schemes in advance of retirement CDC being made available, schemes may not have much appetite to revisit their guided retirement options in the short term.”  

  

Similarly, the Association of Consulting Actuaries strongly supports the development of the legislation to enable retirement CDC but said timing is crucial. 

 

“It is important that retirement CDC arrangements are available for trustees to select as their default before the guided retirement requirements are brought into force under the pension schemes bill. Otherwise, there is a risk that trustees will select their default from the more limited options available,” said ACA chair Stewart Hastie.  

 

The ACA says suitable information about retirement CDC is key, but wants its availability rolled out to the retail market once the first non-retail schemes are set up. In addition, the ACA highlights a need for retirement CDC to work with multi-employer CDC schemes.  

Trustees say member information is key given there are no guarantees in retirement CDC. 

 

“For RCDC to work effectively, members must understand the nature of the product—particularly the collective risk-sharing, including any approach to cohorting, the absence of guarantees, and the potential for benefit adjustments. Clear, consistent and non-technical communications are essential, both at the point of entry and throughout the member’s lifecycle, including prior to retirement,” said Vassos Vassou, vice chair of the Association of Professional Pension Trustees. “This is particularly important if RCDC is used as the default decumulation option in a scheme, as it will impact on the investment strategy during accumulation which may not be suitable if the member does not wish to use the CDC solution.” 

 

Vassou stressed that trustees will need certainty about the minimum disclosure standards, required risk warnings and expected format of member literature.  

 

“These requirements should be set out unambiguously and aligned, where possible, with existing CDC and decumulation-related disclosure regimes to avoid duplication and inconsistency,” he said.  

 

The Pensions Management Institute wants the government to revisit restrictions on member marketing, address concerns around irrevocable defaults, and ensure retirement CDC is integrated into the wider guided retirement framework.  

 

“We welcome the Pensions Roadmap, but rollout for guided retirement and CDC should follow reforms like small pot consolidation and scale requirements - giving schemes time to pilot solutions and work with regulators to deliver better defaults and improve DC adequacy,” said chief strategy officer Helen Forrest Hall. 

The Association of British Insurers also sounded a more cautious note on retirement CDC, citing the importance of member information and the fact retirement CDC is irreversible under current proposals. 

 

Justin Wray, assistant director, head of long-term savings policy, said retirement CDC schemes could provide an additional retirement solution but stressed they should not be seen as a silver bullet: “No single product will suit everyone’s needs. Current proposals mean there is no mechanism to leave a retirement CDC scheme once joined. This potential for harm will be exacerbated if not addressed, as through guided retirement, savers could be defaulted into a scheme. It is important that a cooling off period is built into proposals.” 

  

He added that avers must have all the necessary information to help them understand which product is right for their circumstances, including that with CDC their income can go down as well as up. Members potentially misunderstanding the security of CDC income or simply building an expectation over time that is later frustrated is one of the key risks of CDC, particularly as pensioners are often not just loss averse but time-rich, allowing them to raise political support.  

 

Aegon feels retirement CDC warrants further exploration, but pensions director Steven Cameron warned the government not to “oversell” an unproven concept. 

“It is a highly complex innovation and needs substantially more thought before it can be safely offered within the wider pensions market. Trustees and scheme providers will also need to build full confidence before offering it to members. A key area for consideration is how to frame medical underwriting to avoid those in poorer health unfairly subsidising healthier – which often means wealthier – members,” he said. 

The number of other big workplace pensions changes being driven by government means there are additional ‘bandwidth’ risks, Cameron added. 

“However, if after proper analysis, retirement CDC is shown to be an attractive option, then rather than the current plan to bar it from the retail market, we’d urge the government and [Financial Conduct Authority] to explore how to offer access to retail customers outside workplace pensions, potentially with a requirement to seek advice.”

The move to make CDC available as a retirement option follows a previous decision to expand CDC to multi-employer schemes. Currently, only single employers can offer whole-of-life CDC, with just one employer – Royal Mail – having chosen to do so.