Small legal changes needed to introduce CDC; members have ‘the right’ to transfer out
Only small changes to existing law is needed to introduce collective defined contribution schemes and all members will have the right to transfer out, it has been claimed.
Speaking at a Work and Pensions Committee debate on CDC schemes today, 21 February 2018, First Actuarial senior actuary Hilary Salt stated that CDC could come into force via small changes to existing legislation rather than a full enactment of the 2015 Act.
Also speaking on the panel however, lawyer Sandeep Maudgil, who attended on a personal capacity noted: “The Pensions Scheme Act 2015 is a well thought through piece of work and it does cover what needs to be covered around governance and communication transparency.” However, there needs to be “a clear law change that ensures these schemes are seen as money purchase… Maybe some sort of authorisation like that of master trusts,” he suggested.
London Business School executive fellow David Pitt-Watson explained: “In 2015 parliament passed an act specifically to allow CDC pensions to be introduced, but we haven’t got past the writing of the secondary legislation.”
Maudgil added: “You would not need to enact the 2015 act to open up CDC into the space.”
Furthermore, when asked by the Committee whether transferring out of a CDC scheme is a possibility, Salt explained that each member of these schemes would have a share of the fund and it would be “their right to transfer it out, even up to retirement”.
“There’s absolutely no reason with a CDC scheme why any member shouldn’t be able to transfer out all or part of their benefits to another arrangement.”
She added that while this circumstance hasn’t yet been fully legislated for, it is predicted that there shouldn’t be a reason why the law would prevent transferring out of CDC.
Maudgil agreed that: “It’s borderline inconceivable that now you wouldn’t design it with an ability to transfer out. I don’t think it’s possible in a social context that you would have a scheme that people can’t transfer out of before they get to retirement.”
In order to successfully bring this type of scheme to the market, Pitt-Watson identified three key areas that will need to be addressed. These being clear communications, which he says “is absolutely critical to get CDC to work”, strong governance whereby “there are trustees whose only duty is to the member of the scheme” and the necessity to keep costs low. “If you’re going to introduce CDC you would need something that is at scale with low costs,” he stated.
Salt echoed there is a “need to be transparent and clear with all members about what they might expect and what their future pension might be.”
