Some U.K. defined contribution multiemployer plans could soon be able to help workers secure lifetime income as the U.K. government mulls introducing collective defined contribution options for master trusts.
These collective defined contribution options would be launched as new sections of multiemployer plans and would pool plan participants' assets and investments at retirement and beyond.
In CDC plans, corporate sponsors are off the hook for providing a guaranteed benefit and participants share investment and longevity risks. The U.K. government wants to allow multiemployer plans to introduce CDC options to boost participants' savings overall. As a result of the pooling of longevity and investment risks, CDC investments could be more resilient to market shocks compared with pure DC investments, the U.K. Department for Work and Pensions said in a legislative proposal.
CDC options are also considered to be more affordable to employers because the costs of running CDC is predictable and does not require plan sponsors to offer guaranteed pension benefits unlike defined benefit plans, industry sources added.
In January, the government proposed that master trusts could take advantage of CDC options to the same extent as large single-employer plans already can in the U.K.
Industry experts and master trust executives received the proposal with optimism, noting that making CDC options available through a master trust could enable decumulation options.
Currently, plan participants exit master trusts when they retire and have to seek other providers of retirement options such as cash, annuities or drawdown options. The individual choice of a decumulation option is known as pension freedoms.
But these options have drawbacks, sources said. For example, the retirees that choose drawdown options can run out of cash if they live longer than expected.
A CDC option could provide a 50% higher income vs. insured annuities in retirement, according to Simon Eagle, London-based senior director at Willis Towers Watson PLC.
Chintan Gandhi, partner and head of collective DC at Aon PLC in the U.K., said CDC provides an income for life in retirement that is expected to keep pace with the cost of living but does not require complex financial decisions to be made by plan participants, he said.
From a business point of view, a CDC decumulation option might be attractive for master trusts that are keen to continue to charge for managing the assets they have gathered in accumulation, said Nico Aspinall, founder of Nico Aspinall Consulting in London.
For DC providers that have a wider suite of private wealth investment products, it could be a springboard to talk about further investments, he added.
But also CDC plans have had drawbacks. Shriti A. Jadav, director, retirement at Willis Towers Watson in London, noted that the challenges faced by retirement funds in the Netherlands, where CDC already exists, is around intergenerational unfairness, which arises from smoothing outcomes for participants by holding back funds as a buffer.
By withholding some returns to smooth later potential reductions, the current cohorts of retirees are not receiving the full benefit of the actual returns, with these partly contributing to building up a buffer, which will ultimately benefit future generations, she said.
Because of this issue, the Dutch are moving to a system with DC in accumulation with a limited risk-sharing buffer fund with CDC in decumulation only, so that only retirees are sharing the risk, she said.
After considering this experience, the U.K. did not introduce "Dutch" buffers to its CDC regulation but it is proposing that CDC is extended to decumulation phase for master trusts.
As the consultation on the proposal closed on March 27, the government will consider industry response and approving potential regulation.
"Multiemployer guidance on CDCs broadens the reach and paves the way for CDCs to be accessed by even smaller sponsors," said Andy O'Regan, employer and strategic partnerships director at defined contribution and defined benefit master trust TPT Retirement Solutions, Leeds, England. TPT has £10.3 billion ($12.7 billion) across its defined benefit and defined contribution assets.
"As a multiemployer master trust which offers both DB and DC to members, a proposition like CDC, which combines attributes of both DB and DC, would fit well with our capability and expertise," he said, noting that TPT is in the process of speaking to employers about a multiemployer CDC plan.
In terms of CDC plan design, Mr. O'Regan said that single-employer CDC options are only feasible for large organizations because they are costly to build. For Royal Mail Group Ltd., which is set to launch the U.K.'s first single-employer CDC plan this year following a lengthy process, the endeavor is proving costly with the company expecting to be spending an additional £30 million over the projected cost of £400 million per year, according to half-year results released Nov. 17.
Royal Mail Collective Pension Plan, London, was approved to operate as the U.K.'s first collective defined contribution plan by U.K. The Pensions Regulator on April 13.
Interest among plan sponsors isn't waning. A poll conducted by Aon among its clients showed that 10% of employers are already looking into introducing a CDC option, with a further 14% of companies considering CDC as part of their next review.
Also, the £25 billion defined contribution multiemployer plan National Employment Savings Trust, London, is watching CDC developments.
"We welcome the DWP's consultation on CDC, as despite a few well-documented issues with traditional CDC-style schemes, we think some of the most important concepts underpinning them are worth exploring, particularly following the introduction of pension freedoms," said Zoe Alexander, director of strategy and corporate affairs at NEST.
Ms. Alexander said that NEST's research suggests plan participants prefer sustainable lifelong income and a setup where they would not need to engage with their retirement funds.
Ms. Alexander added that risk sharing can smooth returns and increase the plans' ability to invest in growth assets for longer.
"We believe new ideas are needed if we're to achieve better results for members and help them avoid many of the new risks they face in retirement," she added.
