New pension scheme launched TODAY – What you must know on Collective Defined Contribution

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Collective Defined Contribution (CDC) pensions are expected to provide a hybrid alternative to defined benefit and defined contribution schemes. Under the proposal, employers and employees pay into a collective savings pot which will eventually be used to fund retirement pay. Officials say CDC pensions give employers predictable costs while remaining more resilient against economic shocks, such as those caused by the pandemic, than defined contributions schemes that are becoming increasingly common.

Pensions Minister Guy Opperman will lay regulations in the Commons today to begin establishing the legal framework for the new pensions. He said last night: “I am very pleased that these schemes will soon be able to operate in Great Britain.

“We have seen the positive effect of these schemes in other countries – and it is abundantly clear that when they are well-designed and well-run they have the potential to provide a positive outcome for savers, and can be resilient to market shocks. I have no doubt that millions of pension savers will benefit from CDCs in the years to come.”

Collective Defined Contribution pensions are common in other countries including the Netherlands and Canada. But in the UK all workplace pensions are either Defined Benefit, linked to salary or length of service, or Defined Contribution where pensions are based on how much an employee pays in.

Mr Opperman added: “I know that when saving for retirement, it shouldn’t be a choice between security and affordability. And the new Collective Defined Contribution scheme can help millions of savers find the right balance.

“These new schemes offer an alternative to the status quo by combining a reliable income in retirement for members, with predictable costs for the employer, as well as building in more resilience against economic shocks such as those caused by the Coronavirus pandemic.

“We’ve seen these schemes work overseas in countries such as the Netherlands and Canada, and I’ve been making the case for some time that well-designed and well-run CDC schemes have the potential to provide a positive retirement outcome for savers.

“I’m pleased that the regulations to introduce CDCs are being put before Parliament today, and I hope they can play their part in improving the retirement of those who work hard all their lives to build up a pension”

The regulations being laid today have been drafted to provide criteria for the Pensions Regulator to authorise and supervise CDC schemes. And postal workers could be the first to benefit from the innovation after backing for the idea from Royal Mail and the Communication Workers Union.

Department for Work and Pensions officials are expected to continue discussions with employers, unions and other interested parties about setting up more CDC schemes.

The Pension Schemes Act 2021 includes an authorisation and supervision regime to allow CDC schemes to be established once today’s regulations come into force. Rules are designed to ensure only schemes that are well run and built on sound foundations will be allowed to operate, according to DWP officials.

Schemes must have a clear strategies and resources to deal with any problems that may arise as well as an effective framework for communicating with members. The new regulations are expected to come into force next August following votes by MPs and peers in the New Year.

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