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Defined Contribution

U.K. seeks input on proposal to allow employers to create collective DC plans

The U.K. government is seeking input from plan sponsors, trustees and employers on a proposal that will allow workplace retirement plans to take the form of collective defined contribution arrangements.

In a proposal Tuesday, the U.K. government's Department for Work and Pensions said it intends to consult the industry on a CDC model, which provides for contributions to be pooled in an effort to deliver a target benefit, rather than a guaranteed one.

Under the current legislation framework, only defined benefit funds or individual defined contribution workplace arrangements are allowed.

CDC plans, if introduced, could give plan sponsors the ability to provide a savings option and an income-in-retirement option within the same arrangement. According to the consultation document, participants in CDC plans have a better chance to be cushioned from volatility as investment risk is adjusted for over time. These plans also enable longevity risk protection through risk sharing without participants bearing the cost of accessing insurance products on their own. CDC plans may also allow trustees to allocate to higher returning asset classes than a typical individual DC plans.

However, the government acknowledged that interest in pooled retirement arrangements among employers has been limited to date.

"It is important to be clear that CDC schemes are not a catch-all solution. Such schemes must be based on realistic targets and robust assumptions, and members will need to understand how their benefits work and that their monthly pension will fluctuate in value and can decrease," said Guy Opperman, parliamentary undersecretary of state for pensions and financial inclusion at the DWP, in the consultation document.

Also, the government said in the consultation document that "Royal Mail's initiative could be a model for other employers and other workforces to launch their own CDC scheme."

Over the past 18 months, the 9.6 billion ($12.3 billion) Royal Mail Pension Plan, London, has developing a CDC plan for its workers. Following the development of its CDC plan, Royal Mail asked the government to consider its approach in legislation, one of the factors that led to the current consultation.

In response to the current consultation, Rob Harper, partner at pensions and risk consultancy at Hymans Robertson, said in an emailed comment, "CDC will not be a 'one-size-fits-all' solution."

"A couple of challenges will need to be addressed. These include establishing a suitable regulatory framework to ensure comprehensive governance processes and cost-effective running of CDC schemes. The scale of assets and membership required to pool risk safely will limit this option to only the very largest schemes such as the Royal Mail or other arrangements that can achieve sufficient scale," Mr. Harper said.

Mark Johnson, head of institutional client management at Legal & General Investment Management, said in a separate emailed comment: "We welcome the DWP consultation as an important opportunity to consider how best to provide for millions of retirees in the decades ahead. The binary nature of U.K. pensions could be enhanced by a third way which combines the flexibility of DC with the governance of DB but does so without the burden placed on many employers."

Mr. Johnson added "Whilst CDC is not a panacea to all the U.K.'s pension challenges, the idea of sharing risk between employer and employee offers hope to those concerned with the sustainability of our present system."

The consultation will run until Jan. 16. Responses can be submitted via the DWP's website.