A new type of pension scheme has opened for applications in Britain which could improve retirement returns for savers.
Collective defined contribution (CDC) schemes offer a “middle ground” option between the already existing defined benefit (DB and defined contribution (DC) schemes.
DB schemes, such as final salary schemes, promise employees a guaranteed income, while DC schemes - which are more common nowadays - see savers bear the risk of how much pension they eventually end up with.
DB schemes are very expensive to run now that people are living longer and so have become increasingly rare.
How do CDC schemes work?
CDCs have the potential to provide improved retirement returns for savers, with more predictable costs for employers, the Department for Work and Pensions (DWP) said.
Both employers and employees contribute to a collective fund from which individual retirement incomes are drawn, with trustees responsible for oversight to ensure schemes are viable and can meet their legal requirements and commitments to 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 new schemes were made possible following the passage last year of the Pension Schemes Act.
Regulations currently provide for single CDC schemes, or ones where employers have some sort of connection.
The DWP said that some parties have already expressed an interest in expanding CDC models, including multi-employer CDC schemes.
Nigel Peaple, director of policy and advocacy at PLSA, said: “CDC blends some of the desirable elements of defined benefit, such as clearer target outcomes for the saver, and of defined contribution 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 plans to consult later this year on a package of prospective design principles and approaches to accommodate new types of CDC schemes.
CDC authorisation and ongoing supervision will be administered by the Pensions Regulator.