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We have been monitoring and commenting on the proposals to establish UK Collective Defined Contribution Pension Schemes since originally announced by George Osborne in the 2014 Budget.
This moved forward in March 2019, when the Department of Work and Pensions published its paper, Delivering Collective Defined Contribution Pension Schemes.
The proposals would create a scheme that is something of a hybrid between DC and DB. The key features are:
Both the employer and employee would contribute to a collective fund from which an income is drawn. Investment and longevity risk are pooled across the membership and as the fund is administered and managed on a collective basis, there is no need for members to make choices about the investment of funds or the ways of converting that fund into an income stream in retirement. At present each member has an individual pension “pot” rather than a share of a collective “pot”. Collectivisation would allow investment in longer duration assets and would eliminate some of the drivers for wanting daily liquidity. At this stage, the schemes are assumed to be collective for a single business, but real investment scale and reduction of member volatility would be achieved by collectivisation across an industry. Individuals are much more likely to move employer than they are to move industry completely.
CDC schemes would offer a “target income” at retirement. If the scheme is under (or over) funded then the level of member benefits can be adjusted to ensure the assets of the collective fund are equal to the liabilities relating to the target incomes. This gives members less certainty than under a DB scheme, but a clearer idea of anticipated benefits than under a DC scheme. Individuals would stay in the scheme through retirement rather than drawing down and investing in an annuity. Again, this should have an impact on the investment behaviour of the scheme.
So what does this mean from investment in real estate and other long-term, illiquid assets? It depends…. It could fizzle out to nothing, but if done properly it could be huge and create an investment pool with more appetite for long-term, illiquid assets than even current defined benefit schemes, with some of it allocated to higher risk, higher return strategies.
This became part of a bill published on 15th October 2019, which fell due to the general election. The largely unchanged Pension Schemes Bill [HL] 2019/20 (which you can find here) was announced in the Queen’s Speech on 19th December 2019, and was introduced to the House of Lords on 7th January 2020.
It covers a wide variety of areas. Part 1 and 2 of the Bill would provide for a framework for the operation and regulation of “collective money purchase schemes” (i.e. Collective Defined Contribution Pension Schemes) in the UK.
At that stage, the proposals were intended to deal with specific problems in the Royal Mail Pension scheme, but as we commented at the time, would potentially have much broader applicability.