On 1 August 2022, Pensions Minister, Guy Opperman, published an article “A new third way for pension savers” highlighting the government’s plans for collective defined contribution (CDC) pension schemes and how the regulations and opportunities created by CDC schemes may develop in the UK.
Introduced via the Pension Schemes Act 2021, with the Pensions Regulator laying its code of practice for CDC schemes before Parliament earlier this year, CDC schemes are a new type of trust-based arrangement, intended as a “market innovating” alternative to traditional defined benefit (DB) and defined contribution (DC) pension schemes in the UK.
CDC schemes may be attractive to both employers and employees because contributions are based on the traditional DC model, with fixed rates of employer and employee contributions offering certainty on cost, but also allow for elements of a traditional DB approach in targeting (though stopping short of guaranteeing) pension outcomes for savers. On top of this, CDC schemes enjoy the benefits of collective pooling of administration costs and investment and longevity risks, additionally aiming to provide better overall value to members and greater resilience against economic shocks.
Members of conventional pension schemes frequently struggle with deciding how to convert their pension savings into retirement income in what can be a fairly restrictive annuity market. It is hoped that CDC schemes can help in this context by directly providing retirement income for members, eliminating the cliff-edge risk associated with having to make complex financial decisions at the point of retirement.
Current regulations provide for single or connected employer CDC schemes, but the government has announced its plans to extend CDC schemes to multi-employer, industry-wide and commercial CDC schemes from 2024, with Opperman confirming further consultation is expected later this year on “a package of prospective design principles and approaches to accommodate new types of CDC schemes“. Employers should monitor the progress of CDC schemes to evaluate if they may offer a more cost-effective and employee-favourable method of complying with auto-enrolment obligations.
