After years of speculation, the UK’s minister for pensions and financial institutions has revealed that the government is to release details about setting up collective defined benefit (CDC) pension schemes.
The announcement follows an inquiry in November 2017 and a consultation in October 2018 about this type of pension scheme.
What is it?
CDC pensions are different from defined contribution schemes because, as the word suggest, they do not provide individual pension pots.
It is the company that sets up a collective pension pot that would provide income to its members.
A CDC is different from defined benefit, as the latter guarantees an income stream in retirement, which a collective DC does not. Instead, the former has a target amount members have to pay, based on long-term plan with mixed risk investments.
The government was forced to act fast on this issue since UK’s post provider, Royal Mail and the Communication Workers Union have already been in talks with the Department for Work and Pensions enquiring about the changes needed to implement CDC pension schemes.
“CDCs are not new. I believe they have the potential to get good outcomes for employers and employees when they work together,” said pensions minister Guy Opperman in a speech at the Trade Union Congress earlier this month.
“We want CDC schemes that are designed, set up and governed appropriately, so that members are not exposed to unreasonable risks. We also want CDC schemes that operate in a clear transparent way, building understanding and confidence in this new type of pension.
“CDC has the potential to open up new avenues for employers and their workforces to develop the best pension arrangement for their individual circumstances.”
Security issue consideration
Steven Cameron, pensions director at Aegon said: “It was never in doubt that the government would proceed with the legislation needed to allow the Royal Mail and the Communication Workers Union to proceed with its proposed scheme.
“We hope that the consultation responses will have proved helpful in identifying the many issues that need addressed to protect members of this scheme and of any others set up in future. This will require full consideration of security issues, how to address fairness across cohorts of members and how to frame communications so that members including auto-enrolees understand the specific features of CDC.”
