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Defined Contribution

U.K. pensions department recommends collective benefits as part of legislation but not separate CDC bill

The U.K. Department of Workplace and Pensions recommended that the U.K. government incorporate collective benefits into retirement legislation but advised against legislation that would create collective defined contribution plans, adding the process might be "disruptive."

Following an inquiry into the collective defined contribution plans launched last year, the DWP select committee said in the report published Monday: "Action under the (Pension Schemes Act 2015) is not necessary for CDC (plans) to be introduced. We recommend the government use its existing powers (under Section 32 of the Pensions Act 2011) to amend the statutory definition of money purchase benefits to incorporate collective benefits. This would have the added benefit of reassuring employers that they will not subsequently be held liable for funding deficits," the DWP said.

Instead, the committee recommended that an appropriate methodology for calculating cash-equivalent transfer values for CDC participants in the accumulation stage be developed. The DWP wants the government to establish whether CDC participants should be allowed to transfer out in decumulation and what methodology should be used to calculate transfer values to balance individual rights against collective longevity pooling benefits.

Collective defined contribution plans enable participants to share the costs and risks of investments. Under a CDC arrangement, a traditional pension guaranteed benefit based on a participant's ending salary is replaced by a plan that pools investments across participants and aims to give each a target for retirement income.

The DWP acknowledged that CDC might be appealing to employers reluctant to take on large potential liabilities that come with traditional pension funds. "CDC is an attractive alternative to defined benefit funds," the report said, continuing that "Establishing CDC (plans) in the U.K. opens the possibility of more diverse and ambitious provision of collective retirement plans, including industrywide plans."

The DWP expects the government to assess whether the U.K. Pensions Regulator has the capacity to regulate any future CDC arrangements. "We (also) recommend that the government's consultation include an assessment of The Pensions Regulator's suitability and readiness to regulate CDC plans in terms of its skills, staffing and resource levels and what enhancements may be needed in order for it to perform this new function effectively," the DWP said.

The DWP also wants the government to regulate the issues of the intergenerational fairness. "We recommend the government consult on achieving fair intergenerational risk sharing through CDC plan design."