A new type of pension scheme is up and running, with applications from employers and their retirement fund trustees being accepted by the Pensions Regulator from today.
Royal Mail is expected to provide the first collective defined contribution (CDC) scheme in the UK.
CDCs offer an alternative to the UK’s two primary pension scheme models, defined contribution (DC) and defined benefit (DB).
According to the Department for Work and Pensions (DWP), the new schemes have the potential to transform the retirement fund landscape by providing improved returns for savers and more predictable costs for employers.
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.”
Guy Opperman, pensions minister.
Already used in some other countries, including Denmark, the Netherlands and Canada, CDCs are a variation on the standard DC pension scheme.
Both employers and employees contribute to a collective fund, from which individual retirement incomes are drawn.
Trustees are responsible for oversight to ensure schemes are viable and can meet their legal requirements and commitments to members.
CDC authorisation and ongoing supervision will be administered by the Pensions Regulator.
Explaining the difference between a standard DC pension and CDC scheme, money website Unbiased says they each involve a “money purchase” arrangement, where the scheme member and employer both pay into a pension pot that grows over time.
The key difference is that, with a CDC scheme, this pot is shared between all pension scheme members, instead of each member saving into their personal retirement fund.
Unbiased’s Nick Green adds: “The UK’s first CDC scheme will be Royal Mail’s, and this will be a fascinating case study as to how this new-style pension will be received by UK workers, and how successful these schemes can be in practice.”
CDCs were made possible following the passage last year of the Pension Schemes Act 2021.
Pensions Minister 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.”
Regulations currently provide for single or connected employer CDC schemes.
The government says there is already interest from “some parties” in expanding the new type of scheme.
This may include new multi-employer CDC schemes, or schemes which offer “decumulation only” – when pension savings are converted to retirement income.
The government plans to consult later this year on “prospective design principles and approaches” to accommodate new types of CDC.
A DWP spokeswoman said: “This will bring the potential benefits to more savers in the UK, while also capitalising on the enthusiasm shown for innovation in this area.”
Nigel Peaple, policy and advocacy director for the Pensions and Lifetime Savings Association, a trade body for those involved in designing, operating, advising and investing in all aspects of workplace pensions, said CDCs offered both benefits and challenges.
He added: “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.
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“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.”
But Mr Peaple said PLSA was confident the “ambitious” new type of pension scheme would deliver both the “incentive and momentum” to overcome these challenges.
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