New type of pension scheme launches

A new type of pension scheme has launched, with applications now open from 1st August in Great Britain.

Collective Defined Contribution (CDC) pension schemes aim to offer improved retirement returns for savers, with more predictable costs for employers as an alternative to the two existing models for pension schemes, Defined Contribution (DC) and Defined Benefit (DB) schemes.

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 launch of the new scheme follows last year’s landmark Pension Schemes Act 2021. CDC schemes allow both employers and employees to contribute to a collective fund from which individual retirement incomes are drawn. Regulations currently provide for single or connected employer CDC schemes, with trustees responsible for oversight to ensure schemes are viable and can meet their legal requirements and commitments to members.

Some parties have already expressed an interest in expanding CDC models, including multi-employer CDC and decumulation only schemes.

Pension providers have welcomed the launch of the new model.

Nigel Peaple, Director Policy & Advocacy at PLSA, the trade association for the pensions and savings sector, 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.”