UK chancellor Phillip Hammond is expected to launch a consultation on 29 October on introducing collective defined contribution (CDC) pensions in the UK.
It is anticipated that the launch will coincide with the release of the UK’s last budget before its exit from the EU.
The consultation will begin the process of implementing the legal and regulatory guidelines to allow employers to build collective schemes, which are already commonplace in the Netherlands, Canada and Denmark.
It follows an inquiry into CDCs, also known as ‘defined ambition’ schemes, in November 2017.
CDC schemes differ from defined benefit (DB) schemes because they do not promise a certain level of retirement income. Instead, a CDC scheme has a target or ‘ambition’ amount it will pay out, based on a long-term, mixed-risk investment plan.
Positive headlines
Tom Selby, senior analyst at AJ Bell, said: “The government is clearly chasing some positive pensions headlines by launching its CDC consultation alongside the budget.
“In establishing the framework for such schemes to exist in the UK, it is important both the benefits and potential risks are fully explained to members.
“CDC works in a similar way to the old-fashioned with-profits policies that were popular in the UK in the 1980s and ’90s. This means that rather than each member having their own individual pot – as is the case with conventional DC – all assets are pooled together and invested collectively.
“The collective fund then aims to provide members with a certain level of pension each year, without actually promising or guaranteeing it.”
Several UK firms, including Royal Mail, have committed to offering CDC to its members once the rules are in place.
Challenges ahead
AJ Bell stated that CDC schemes could potentially provide members with higher returns. However, the UK Government has previously announced that claims suggesting CDC returns could be 50% higher than individual DC schemes should be “treated with extreme caution”.
The firm also admitted there are several benefits of CDC that are already available to DC members, including the ability to hold risk-seeking assets over the long term while paying low charges.
It admitted that there would be challenges for the government if CDC schemes were to be implemented.
Selby added: “If the government believes there is demand from employers and savers for CDC it makes absolute sense to build a framework to support them.
“This needs to ensure members benefit from the same levels of governance, transparency and fairness that exist in the conventional DC market.
“It will also face challenges in ensuring the inherent inter-generational conflict that exists in CDC schemes are managed.”
