Collective Defined Contributions (CDC), a new type of pension scheme, have been officially launched today.
The Department for Work and Pensions says CDCs will provide an “injection of innovation” in the pension sector.
Collective Defined Contribution pension schemes will offer an alternative to Defined Contribution (DC) and Defined Benefit (DB) schemes.
They allow employers to share pension scheme costs with other employers by pooling resources. CDC schemes can serve several employers at once.
The DWP says that CDCs have the potential to provide improved retirement returns for savers, with “more predictable costs for employers.”
Under CDCs both employers and employees contribute to a collective fund from which individual retirement incomes are drawn. Trustees are responsible for oversight to ensure schemes are viable and can meet their legal requirements and commitments to members.
Pensions Minister Guy Opperman MP said: “CDC schemes have the potential to transform the UK pensions landscape.
“We have seen the positive effect of these schemes in other countries and it is abundantly clear that, when well designed and well run, they have the potential to provide a better retirement outcome for members, 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.”
The new schemes, debated for several years, were made possible following last year’s Pension Schemes Act 2021.
Regulations currently provide for single or connected employer CDC schemes.
While few CDCs have yet been been launched the DWP says that some parties have already expressed an interest in expanding CDC models, including multi-employer CDC schemes, as well as the potential for CDC schemes which offer “decumulation only” – when pension savings are converted to retirement income.
Nigel Peaple, director policy & advocacy, PLSA, said: “The PLSA supports innovation within the pensions sector where it improves people’s retirements. CDC blends some of the desirable elements of Defined Benefit (DB), such as clearer target outcomes for the saver, and of Defined Contribution (DC) schemes, such as predictable contributions for the employer and member. By pooling longevity risk and the ability to invest money over a longer period, CDC has the potential to provide new and better approaches for benefit provision.
“There are, of course, challenges, including how to ensure savers understand the variability of benefits, and ensuring new models can deliver in practice once reserving and regulation is in place. Nevertheless, we are confident that this ambitious proposal will provide the incentive and momentum to overcome them.”
The DWP plans to consult later this year on design principles and approaches to accommodate new types of CDC schemes.
CDC authorisation and supervision will be administered by The Pensions Regulator.