Collective defined contribution (CDC) schemes are now on the horizon, with Royal Mail lining up to be the first UK employer to launch this type of scheme, later this year.
Already well-established in countries such as the Netherlands and Denmark, the schemes were given the green light by the then Work and Pensions Secretary, Amber Rudd, in March 2019.
The new schemes aim to bridge the gap between DB and DC schemes.
They may be attractive to companies who are keen to offer a good pension but are less keen on the liability aspects of a DB pension scheme.
CDC schemes provide a regular retirement income by pooling and investing group contributions.
Also known as a type of ‘defined ambition’ scheme, they pay out a target or ‘ambition’ amount, aimed at providing people with a sufficient level of index-linked pension for life.
Unlike DB schemes, members are therefore not promised a specific retirement income.
A force for good
So, are CDC schemes a positive introduction to the range of pension-saving options available?
Sandeep Maudgil, a partner at solicitors, Slaughter and May was one of the experts called to give evidence to the House of Commons Parliamentary Select Committee on Work and Pensions when it considered CDC pensions in 2019.
He says: “Given the demographic issues which this country faces, anything which broadens the space of properly regulated ways in which people are able to provide for their retirement, particularly in a way which enables them to share the investment and longevity risks associated with retirement-benefit provision, has to be a good thing.
Fiona Tait, technical director at Intelligent Pensions agrees there is room for new options in the pensions space, as she says: “It’s always a good thing to look for new solutions, as there have been an awful lot of pressures on DB schemes.
“It is too early to say whether CDC schemes will work, but they have some very strong advocates.
"If they do get off the ground, the have the potential to be useful.”
Possible problems
Some potential issues with CDC schemes are anticipated, however, as Mr. Maudgil says: “The key issue for CDC will be communications.
"CDC has the ‘look and feel’ of a traditional pension scheme – and that is one of its key attractions from a member and union perspective.
"The way the benefits build up is easy to understand, and the fact that they are communicated in pension form, rather than as a retirement account capital sum which then needs to be converted into pension form before someone can understand how much income they will actually have to live off when they retire, is a major advantage over traditional DC.
“But that can also be a drawback if members don’t understand the key difference between CDC and a traditional DB scheme, namely that CDC benefits are not guaranteed.
“This is why the government has always been clear that transparent member communications will be extremely important.
