Applying the trustee lens to the CDC consultation
As a professional trustee company with collective defined contribution (CDC) appointments, we’re supportive of The Pensions Regulator’s (TPR) efforts to introduce a single robust framework that ensures CDC schemes operate transparently, fairly and with appropriate safeguards for all stakeholders.
With the numerous stakeholders involved, ranging from sponsoring employers, advisers and trustees to (most importantly) members themselves, one of our ongoing objectives – in line with our fiduciary duties to protect the interests of the members we represent – is to improve the day-to-day operation of pension schemes.
We’re also here to enable members to enjoy better incomes in retirement. Having the ability, for example, to access wider investment opportunities, sharing/pooling investment and longevity risk and reducing transaction and operational costs through the benefits of scale of pooling funds should deliver the opportunity for members to receive a more secure, stable retirement income.
Governance and trustee responsibilities
Effective governance is paramount for the success of CDC schemes. We advocate for trustee boards to include a diverse range of skills and experience, with specific expertise in governance, investment, actuarial matters and member communications.
Boards must maintain a pragmatic and positive approach, always with the best interests of members in mind. Trustees must be appropriately equipped to understand the complexities of CDC operations and TPR’s requirements. This includes actuarial valuations, adjustment mechanisms, investment opportunities and the communication of risk to members. This is not a simple ask.
We are supportive of TPR providing clear guidance and ongoing support to trustees through the code, including training resources tailored to CDC-specific issues to assist in acquiring the required knowledge and expertise. Additionally, regular independent reviews of governance processes and board effectiveness should be encouraged to maintain best practice standards.
Member communication and engagement
Transparent communication is essential to ensure members understand the nature of CDC schemes, particularly the variability of benefits and the mechanisms for adjustment. Clear explanation of the ramifications and outcomes for members will be needed. From a member perspective, CDC could be considered more complex to communicate than either DB or DC.
We think TPR should set clear requirements for member communications, including the use of plain English, illustrative scenarios and benefit projections, focusing on what these all mean for the member. Tailoring timing of communications to be relevant for individual or cohorts of member would enable more meaningful engagement.
Risk management and actuarial oversight
CDC schemes introduce unique actuarial and investment risks. We support the requirements in the code for robust risk management frameworks, including stress testing, scenario analysis and the use of independent actuarial oversight. Trustees should have access to detailed risk reports and be empowered to take timely action as soon as scheme sustainability might be deemed is at risk.
Regulatory oversight and reporting
We welcome TPR’s proposals for enhanced oversight and reporting requirements for CDC schemes. To avoid over-burdening schemes, we suggest governance reporting should be sufficiently comprehensive but proportionate to the risks. It should focus on key risk indicators, governance processes and member outcome metrics.
The framework to detail the operations of the systems, processes and long-term financing of the scheme through a clear business plan provides clarity for the trustee decision making and balance of powers for the scheme operation.
TPR should also consider establishing a CDC scheme register to monitor developments and, to adopt and establish best practices across the industry going forward, facilitate knowledge sharing across the industry.
We’re fortunate to already be appointed to two CDC schemes, gaining valuable insight and experience. We believe, with strong governance, clear communication and effective risk management, CDC schemes can play a valuable role in the future of workplace pensions and are an exciting development for professional trustees.
If you’d like to learn more, you can visit our DC schemes page.
