Ministers must not accelerate the new Retirement CDC schemes, pension provider Aegon warned, as the proposals remain untested and require far deeper scrutiny before any widespread rollout.
The warning comes as the Department for Work and Pensions (DWP) consultation on the new collective arrangements closes today.
“The concept is unproven. It is a highly complex innovation and needs substantially more thought before it can be safely offered within the wider pensions market”, Steven Cameron, pensions director at Aegon, said.
“The concept of Retirement CDC warrants further exploration and analysis and could prove to be a valuable addition to retirement options”.
He said there are significant concerns about progressing too quickly.
Mr Cameron urged caution over any effort by the Government to promote the schemes too strongly, particularly amid suggestions they could become a default option under forthcoming pension legislation.
Retirement CDC is a newer variation of Collective Defined Contribution models and differs from existing arrangements used throughout a member’s working life.
Instead, these schemes would begin at the point an individual starts taking their retirement income and could also be adopted as a default option by trustees or providers.
Members are paid an income intended to track inflation across their lifetime, but payments are not guaranteed and may vary each year.
The warning follows the closure of the DWP’s consultation on collective arrangements today
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If investment performance fails to meet expectations, member income can fall. He said trustees and providers must be confident in every aspect of the new model before offering it to savers.
“A key area for consideration is how to frame medical underwriting to avoid those in poorer health unfairly subsidising healthier which often means wealthier members”, he said.
Mr Cameron also questioned the reliability of any projections currently being circulated.
“While there have been various claims around the likely income from Retirement CDC, these are highly dependent on investment strategy and are unproven”, Mr Cameron said.
He believes that that the Government should not encourage trustees or providers to adopt the model prematurely
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GETTYHe repeated his concern that the Government should not encourage trustees or providers to adopt the model prematurely.
“We urge the Government not to ‘oversell’ the concept to trustees or scheme providers particularly if, as the consultation implies, it sees Retirement CDC as a candidate for the Pension Schemes Bill’s default pension benefit solutions”, he said.
He said any broader rollout will demand careful planning rather than rapid implementation.
Aegon research carried out with AON suggests around a third of pension savers find the idea of Retirement CDC appealing.
Mr Cameron also pointed to potential capacity pressures within the industry.
He added that proven benefits of Retirement CDC should see the model applied outside workplaces too
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“With so many other huge workplace pensions changes being driven by Government, there are additional ‘bandwidth’ risks here across much of the industry”, he said.
He added that if detailed analysis eventually shows Retirement CDC offers genuine benefits, then the model should not be limited to workplace environments.
“If after proper analysis, Retirement CDC is shown to be an attractive option, then rather than the current plan to bar it from the retail market, we’d urge the Government and FCA to explore how to offer access to retail customers outside workplace pensions, potentially with a requirement to seek advice,” he said.
Aegon provides pension and investment services to more than 3.5 million customers across the UK.
DWP have been contacted for comment.