More people than ever are saving into a workplace pension – £28 billion more in 2020 than in 2012 – with most of these pension pots being Defined Contribution (DC) schemes, where the employee is automatically enrolled to save a proportion of their salary tax-free and the employer contributes at least 3% of their salary to the pot too.
But a lack of innovation and reform of the DC savings landscape risks some future pensioners bearing large risks, in terms of the value of their investments and whether their savings will provide an income throughout their retirement.
Collective Defined Contribution (CDCs) are a new type of pension scheme that sees both the employer and employee contribute to a collective fund. Due to the scale of these funds and the pooling of risk for members, they can aim to provide a target pension income for life – similar to Defined Benefit (DB) schemes, sometimes called an average or final salary pension, but without the risk of significant unexpected bills for employers.
In the UK, Royal Mail have already launched a CDC scheme for their employees which has over 100,000 members who are offered a combination of a cash lump sum and an income for life in retirement.
Speaking at the LCP Conference in London, the Minister for Pensions confirmed new regulations, set to be laid in the Autumn, will allow for multiple employer CDC schemes to be established, so that a range of unconnected employers can pool their employees’ pension pots into a collective fund, boosting returns for savers.
These pooled pension investments will mean higher incomes in retirement, and help individuals manage the uncertainty about how long that retirement will be. Minister for Pensions, Torsten Bell said:
“Success in the world of pensions isn’t just about getting people saving, it’s ensuring their savings work as hard as possible for them.”
Making sure more employers and savers have the option of an innovative Collective Defined Contribution Pension scheme is an important part of making that happen.
Too often at present we are leaving individuals to face significant risks, about how their individual investments perform and how long their retirements last. Pooling some of those risks will drive higher incomes for pensioners and greater investments in productive assets across the economy.”
The Minister also confirmed his desire to deliver decumulation only CDC schemes. These schemes would allow certain savers with DC schemes to access CDCs, offering retirees the chance to buy longer term, pooled retirement products that deliver stability for pensioners.
