The new type of ‘super’ pension scheme was due to be outlined by Pensions Minister Guy Opperman today.
Mr Opperman, minister for pensions and financial inclusion, said: “Collective Defined Contribution pension schemes are an important innovation which will provide more choice and flexibility for pension scheme members and employers.
“It’s important we get this right which is why we’re consulting on the detail of our proposals before bringing legislation forward. I want to hear the views of the pensions industry as we prepare to introduce CDC pension schemes.”
More stability and longer term security are also key aims of the CDC plans.
Large-scale CDC schemes, of a typed used in the Netherlands, would allow DC pensions to effectively be ‘pooled’ across sectors and firms to help cut administration costs and pool risk across potentially thousands of employees.
Mostly, at present, Defined Contribution schemes are linked to individuals and companies and risk and costs are not shared across sectors or firms.
The consultation will provide more details of how the schemes could work. A potential Royal Mail CDC scheme is believed to be one of the major drivers of the plans initially.
Over the past two decades the majority of British workers in an occupational scheme have been moved from more costly Defined Benefit (Final Salary) schemes to cheaper Defined Contribution (Money Purchase) schemes which minimise future costs and risk for employers.
The introduction of Collective Defined Contribution schemes has been touted for some time.
However, a former Pensions Minister Sir Steve Webb, director of Policy at Royal London said he believed the it will be “many years” before CDC is up and running.
He said: “Innovation in pension provision is to be welcomed, but the timetable for consultation and potential future legislation means it will be many years before a single CDC scheme could be up and running. Designing the legislation specifically around the needs of the Royal Mail is understandable, but probably also limits the potential for other employers to implement variations on the Royal Mail model.
“One of the attractions of CDC for members is the smoothing out of the ups and downs of the stock market, but in the Royal Mail’s model there is no ‘buffer’ to cushion the impact of such changes on member benefits. This could mean pensioners seeing their pensions in payment cut from one year to the next which will present a massive communications challenge.”
The consultation is set to apply to England, Wales and Scotland with Northern Ireland getting its own legislation.
In reaction to the announcement, Steven Cameron, pensions director at Aegon, said: “The concept of Collective Defined Contribution schemes has proved particularly controversial across the pensions industry, gathering strong support from some, and raising equally strong concerns with others. Today’s consultation will hopefully bring some rigour and logic to the debate, exploring where CDC might appeal to employers and benefit members, while also facing up to the many financial and communication challenges it poses.
“One of the key features of CDC is the inherent cross-subsidy across and between generations. Any employer considering offering a CDC scheme will need to be sure current and future employees know that younger generations may be required to bail out older generations in certain circumstances. There’s also a huge communication challenge in explaining to people that while they will be presented with a ‘target’ income, in practice, their pension benefits could go down as well as up even when they are in payment. These issues are compounded if CDC is used for automatic enrolment, where members will join by default, often with no engagement with the nature of the scheme.
“The CDC concept in other countries places restrictions on when and how benefits can be taken and on transferring into another scheme. Applying equivalent restrictions in the UK would conflict directly with the huge popularity of the UK’s pension freedoms.”
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