London (Parliament Politics Magazine) – Strategies to broaden access to a new type of pension scheme permitting savings to be pooled have been set out by the UK Government.
Collective defined contribution (CDC) pension schemes have the prospect of delivering trustworthy returns for savers while providing more predictable costs for employers, the Government stated. It undertook a six-week consultation into extending the scheme.
How do CDC schemes compare to DC and DB pensions?
CDC schemes offer another possibility in addition to defined contribution (DC) schemes, where employees handle the risk as individuals as to how much money they end up with in retirement, and defined benefit (DB) schemes, which pledge pension savers a certain income in retirement based on their salary. DB schemes, which are often depicted as “gold-plated” due to their guarantees, have growingly been replaced by DC pensions.
How does pooling risk benefit CDC pension schemes?
CDC schemes are sometimes witnessed as a compromise option. Employer and employee contributions are pooled into a single fund, extending out risk and potentially providing a more predictable pension income, based on joint investment performance. Pooling risk also implies that schemes can invest more in development assets, including in the UK, and for longer than an average DC scheme, the Government stated, supporting its growth mission for the economy.
Minister for Pensions Emma Reynolds stated: “We are seizing this exciting opportunity to modernise our pensions market to deliver better outcomes for millions of workers. People work hard to put money aside for their pension with every paycheque. This significant innovation will offer a more predictable income and greater finance security for future pensioners.”
Why is the government broadening access to CDC schemes?
Currently, only single or connected workers can set up CDC schemes, with the first scheme undertaken by the Royal Mail. The Government is now aiming to broaden access further by permitting unconnected multiple employer schemes, making such schemes more open to a wider range of firms and employees.
The consultation aims views from employers, industry experts, pension providers and the public on draft laws and their potential effect. It will operate until November 19 and it involves England, Scotland and Wales.