Collective Defined Contribution pension scheme approved by Government
18 March 2019
Plans for the first Collective Defined Contribution (CDC) pension scheme in the UK have been approved by the Work and Pensions Secretary.
In November 2018 the Government published a consultation which set out its proposals as to how a particular form of CDC scheme might work in the UK and the legislative and regulatory regime that would be needed to support any such scheme.
CDC pension schemes allow contributions to be pooled and invested to give members a target benefit level.
Advantages of CDC schemes include that they:
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Provide savings and income in retirement option within one package that is potentially attractive to people who are uncomfortable making complex financial decisions at the point of retirement
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Enable the sharing of longevity risk between members, therefore providing each individual member with an element of longevity protection without the cost of accessing the insurance market
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Allow employers to offer their employees a pension scheme, which offers an income in retirement in the form of a pension from the scheme’s own assets, but without the risks and balance sheet impact of sponsoring a defined benefit plan
The response to this consultation has now been published and the vast majority of respondents were supportive of the establishment of CDC pension schemes.
Work and Pensions Secretary Amber Rudd said:
“…These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators.
The new type of pension is currently used in Denmark and the Netherlands - 2 countries widely recognised as having among the best pension systems in the world…
…The benefits of CDCs are clear. Members get more certainty in their retirement, with regular payouts from their scheme. And unlike traditional final salary pension schemes, those payouts aren’t affected if your employer goes under.”
The new schemes are expected to appeal to companies who want to offer strong pensions provisions to employees without having to hang on to enormous pension liabilities.
The government has worked closely with Royal Mail and the Communication Workers Union (CWU) to develop the proposals to introduce CDC pension schemes.
The consultation response confirms that primary legislation will be brought forward to introduce CDCs as soon as parliamentary time allows.
Geographical extent – Legislation will apply to England, Wales and Scotland. It is envisaged that Northern Ireland will make corresponding legislation.