The two main pension scheme structures in the UK, defined contribution (DC) and defined benefit, will be replaced by collective defined contribution pension schemes, or CDCs for short (DB).
CDCs have the potential to offer savers better retirement returns while bringing down employers’ expenditures.
Employers and employees both make contributions to a pooled fund from which individual retirement incomes are drawn.
Trustees are in charge of overseeing the funds to make sure the retirement plans are financially sound and can fulfil their legal obligations as well as their obligations to the members.
Minister for Pensions, Guy Opperman, said:
“CDC schemes have the potential to transform the UK pensions landscape.
We have seen the positive effect of these schemes in other countries and it is abundantly clear that, when well designed and well run, they have the potential to provide a better retirement outcome for members, and can be resilient to market shocks.
I have no doubt that millions of pension savers will benefit from CDCs in the years to come.”
The historic Pension Schemes Act 2021 was passed last year, opening the way for the new programmes.
Currently, regulations allow for CDC plans with single or more associated employers.
A few parties have already expressed interest in developing CDC models, including multi-employer CDC plans and the potential for CDC plans that simply offer “decumulation”—the conversion of pension assets into retirement income—as a benefit.
Nigel Peaple, Director Policy & Advocacy, PLSA, said:
“The PLSA supports innovation within the pensions sector where it improves people’s retirements. CDC blends some of the desirable elements of Defined Benefit (DB), such as clearer target outcomes for the saver, and of Defined Contribution (DC) schemes, such as predictable contributions for the employer and member. By pooling longevity risk and the ability to invest money over a longer period, CDC has the potential to provide new and better approaches for benefit provision.
There are, of course, challenges, including how to ensure savers understand the variability of benefits, and ensuring new models can deliver in practice once reserving and regulation is in place. Nevertheless, we are confident that this ambitious proposal will provide the incentive and momentum to overcome them.”
The DWP intends to conduct consultations later this year on a set of prospective design guidelines and methods to support various new CDC scheme types.
More savers in the UK will now have access to the potential benefits, and it will also take advantage of the passion for innovation in this field.
Further information
The Pensions Regulator, which has established comprehensive practical support for schemes through operational advice and a Code of Practice, will be in charge of CDC authorization and ongoing oversight.