The UK Government has unveiled ambitious plans to modernise the pensions market by expanding access to Collective Defined Contribution (CDC) pension schemes.
This move aims to deliver better outcomes for millions of workers whilst supporting economic growth.
Emma Reynolds, minister for pensions said: “We are seizing this exciting opportunity to modernise our pensions market to deliver better outcomes for millions of workers.”
The Government has launched a six-week consultation on extending CDC provision, which could offer more predictable income and greater financial security for future pensioners.
Currently limited to single or connected employers, the proposed changes would allow unconnected multiple employer schemes, making CDC more accessible to a wider range of businesses and employees.
CDC schemes offer a middle ground between defined benefit and defined contribution pensions. They pool employer and employee contributions into a single fund, spreading risk and potentially providing more predictable pension income.
Those approaching retirement are encouraged to seek guidance on how to boost their pension income GETTYThis collective approach allows for investment in growth assets, including UK infrastructure and start-ups, supporting the government’s economic growth mission.
The Royal Mail recently launched the UK’s first CDC scheme, paving the way for broader adoption. They launched a collective pension plan for its 100,000 staff – following in the footsteps of companies in Canada, Denmark and the Netherlands, where the model is commonplace.
Tom McPhail of The Lang Cat consultancy explained that CDC schemes have advantages in both the accumulation and decumulation phases, potentially allowing for greater investment risk and more informed decisions on retirement income.
The Government’s consultation seeks views from employers, industry experts, pension providers, and the public on draft regulations and their potential impact. It will run until November 19, 2024.
John Ball, chief executive of the Church of England Pensions Board, welcomed the draft regulations, stating: “We look forward to scrutinising the detail, and to seeing how in due course, such an arrangement might transform retirement plans for those who work for the Church.”
The UK Government plans to introduce legislation in 2025, with the potential for the first multi-employer CDC scheme to launch within a couple of years.
In Canada, similar pooled pension contributions are invested in infrastructure, start-ups, and private equity, benefiting the wider economy and boosting returns.
By extending CDCs in Britain, the Government aims to achieve greater returns for savers whilst supporting its growth mission.
Currently, just 4.4 per cent of the £830billion in British pensions is invested in domestic equities. The Government’s Mansion House compact committed large pension providers to invest at least five per cent of their defined contribution assets in private assets by 2030.
CDC schemes could further boost investment in British businesses and infrastructure, potentially drumming up billions in additional funding.
Andy O’Regan, Client & Strategic Partnerships Director at TPT Retirement Solutions, expressed enthusiasm for the new regulations. He said: “The introduction of multi-employer whole-of-life CDC scheme regulations will be a landmark moment for UK pensions.”
O’Regan highlighted the potential advantages of CDC schemes, including higher benefits and income for life compared to traditional defined contribution plans.
He added: “We believe many employers, pension savers, and the wider economy could benefit from the introduction of these schemes.”
However, some experts caution that savers may sacrifice control over their investments in CDC schemes, particularly if there’s a focus on UK-based assets.
The expansion of CDC schemes represents a significant shift in the UK pensions landscape. Whilst offering potential benefits, challenges remain in implementation and adoption.
The Government’s push for CDC schemes aligns with its broader economic goals, potentially boosting investment in British businesses and infrastructure.
However, as McPhail noted generating enthusiasm among employers may prove challenging. “I’ve yet to see employers queuing round the block wanting to move employees on to collective defined contribution schemes,” he said.
Despite these hurdles, CDC schemes could offer a promising middle ground between defined benefit and defined contribution pensions, potentially improving retirement outcomes for millions of Britons.