Collective Defined Contribution pensions are coming
Plans to introduce the first Collective Defined Contribution (CDC) pension scheme in the UK have been backed by the government.
CDC pensions came to light in the Pension Schemes Act 2015, which made provision for alternative designs to the traditional defined benefit or defined contribution pension schemes.
They work by sharing risk between the scheme sponsor and its members and have already been used in Canada and Holland. CDC schemes seek to offer less risk than defined contribution schemes, while putting less of a burden on employers than 'gold-plated' defined benefit schemes.
The CDC scheme would be seen as a halfway house between the two, as members would share risk by putting their money into one fund instead of individual pots.
Research into the possible use of CDC pensions has shown that could offer advantages such as certainty of cost for employers and better outcomes for scheme members when compared with defined contribution pensions.
They are also expected to provide pension scheme members with a better idea of how much income they are likely to get in retirement.
The introduction of the UK's first CDC scheme, proposed by the Royal Mail and the Communication Workers Union, has been backed by Work and Pensions Secretary Amber Rudd, who said:
"Introducing a completely new pension scheme to the market is yet another revolutionary reform in this government's quest to transform the retirement saving culture in this country."
The CDC scheme proposals are expected to deliver better investment returns for investors, as well as cutting costs and red tape for employers.
By delivering more certainty than a defined contribution scheme about the level of likely income in retirement, CDC schemes appear to have the edge over plans based merely on a pot of money.
And compared with gold-plated final salary pensions, which are increasingly rare now in the private sector, CDC schemes are protected from the insolvency of the sponsoring employer.
Group contributions to CDC schemes are pooled together for investment purposes, with economies of scale leading to lower costs and therefore improved returns.
They are also expected to appeal to employers who want to offer their staff access to generous pension benefits, without creating massive pension liabilities.
Jon Millidge, Chief Risk and Governance Officer, Royal Mail, said: "This is very welcome progress. Royal Mail and CWU have been campaigning together to bring about this legislation, building a cross-party alliance of supporters in both Houses of Parliament as well as working with the government.
"We now look ahead to the next stage, and ultimately, delivering the UK's first CDC pension."
Before the first CDC scheme in the UK is introduced, parliament will need to bring forward primary legislation.
Within this legislation, there will be checks and measures to ensure fairness for all members within a CDC scheme, as some critics of the pension schemes are concerned about balancing risk between younger and older members.
Trustees who are responsible for CDC schemes will need to clarify to members at the outset the potential for fluctuations in payouts, depending on investment returns at the time.
The proposals are a positive step forward, and are expected to appeal to companies who want to offer strong pensions provisions to employees without having to hang on to enormous pension liabilities. However, their wider introduction and impact is likely to be a few years away yet.
For more information or to discuss the pension options for you and/or your company, contact Kellands Corporate.