The Government has started a consultation to introduce legislation that would broaden the scope of collective defined-contribution (CDC) pension plans.
CDC pensions are also called “Dutch Style” pensions because they are very popular in The Netherlands. They are a compromise between defined benefit schemes (DB or final salaries schemes) and defined contributions (DC schemes).
DB plans, which provide predictable payouts upon completion of the plan, are generally closed to new participants in the private sector. Many employers prefer DC plans, where the payouts are based solely on the performance of investments.
A CDC scheme will have a goal or ambition for what it will pay, and offers an element of risk sharing between the employer and employee as well as an additional level of protection for employees.
Royal Mail launched the UK’s first CDC pension plan yesterday. It will provide over 100,000 employees both a retirement income and a lump-sum.
Royal Mail has been the only company that has announced plans to launch a CDC pension in the UK.
The Consultation is open until the 19th of November and seeks employer’s views on draft legislation which would expand access to these schemes. It also sets out what employers must do in order to be authorised to run them effectively.
If companies “club” to create large CDC schemes this could lead to more investment being channeled towards UK infrastructure. Companies would require more details on how it would work and what protections could be offered.
In August, it was rumored that Treasury would look at a Canadian Pensions Model that consolidates smaller pension schemes in the public sector into one “giant” fund. This model could reduce administrative costs and attract external investment.
Willis Towers Watson’s 2020 research found that CDC plans could provide annuities in the range of 70% more than DC plans and 40% more than DB plans.
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