The commons select committee announced Friday that the inquiry will assess whether these retirement savings plans could address some of the concerns that policymakers and the public have about the current pension schemes on offer.
Ambitious target
Collective defined contribution (CDC) schemes differ from defined benefit (DB) schemes in that 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.
It aims to pay out an adequate level of index-linked pension for life, but this is an ambition rather than a contractual guarantee. The schemes have the scope to redefine the benefits they offer if circumstances, such as adverse economic conditions, require.
"What the select committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could club together and pool the risk themselves.”
Additionally, CDCs differ from traditional defined contribution (DC) schemes in that they do not produce an individual pension pot. Instead, they invest all contributions into a larger “collective” pot and then provide an income to each contributor during their retirement.
As a result, CDC schemes take the big central decision of pension freedoms out of retirement planning, and also much of the risk, the committee paper states.
Research from the RSA and Aon Hewitt estimate that CDC schemes could have delivered 33% better pension outcomes than tradition DC of the past 50 years.
Potential benefits to savers
An inquiry into merits of this idea is being launched by the committee to determine:
- the role that ‘defined ambition’ CDC schemes could play in the pension landscape;
- the potential benefits to savers and the wider economy; and,
- the legislative and regulatory framework that would be required to make it work.
Committee chair, Frank Field MP, said: “What the select committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could club together and pool the risk themselves.”
Mistrust and disengagement with pensions
The committee said that its ongoing inquiry into pension freedoms has highlighted the general level of mistrust and disengagement with pension plans, and “it is well known that policy makers are keenly looking for ways to get people to plan and save much more for their retirement”.
Advocates of CDC schemes argue that they provide greater assurance of retirement income and more efficient pooling of costs and risks among members than traditional DC, but do not impose the burden of underwriting an onerous pension promise on employers.
Detractors, however, argue that CDC may further fragment the pension landscape, suffer from lack of demand, and run counter to the trend towards greater individual freedom and choice in pensions.
The committee has invited evidence from interested parties with a deadline of 8 January 2018.
