A new type of pension scheme is launched in the UK

Collective contribution-based pension schemes offer a

Group defined contribution pension schemes offer a ‘middle ground’ option between existing schemes (Nick Ansell/PA) (PA Archive)

A new type of pension scheme has opened for applications in the UK.

Collective defined contribution pension schemes (CDCs) offer a ‘middle ground’ option between existing schemes.

With defined benefit (DB) schemes, such as final salary schemes, employees are promised a guaranteed income, and with defined contribution (DC) schemes, which are more common today, the saver bears the risk of how much pension they ultimately end up with. .

DB schemes have become increasingly rare as they are expensive to run with people living longer.

CDCs have the potential to deliver improved pension returns for savers, with more predictable costs for employers, the Department for Work and Pensions (DWP) said.

We have seen the positive effect of these schemes in other countries

Pensions Minister Guy Opperman

Both employers and employees contribute to a collective fund from which individual pension income is drawn, with trustees responsible for oversight to ensure that the schemes are viable and can meet their legal requirements and obligations to members.

Pensions Secretary Guy Opperman said: “CDC schemes have the potential to transform the UK pensions landscape.

“We have seen the positive impact of these schemes in other countries and it is quite clear that when well designed and well run they have the potential to provide a better pension outcome for members and can be resilient to market shocks.

“I have no doubt that millions of retirement savers will benefit from CDCs for years to come.”

The new schemes were made possible after the Pensions Act was passed last year.

Regulations currently provide for single CDC schemes or those where employers have some form of affiliation.

Some parties have already expressed an interest in expanding CDC models, including multi-employer CDC arrangements, the DWP said.

By pooling longevity risk and the ability to invest money over a longer period, CDC has the potential to offer new and better approaches to benefit planning

Nigel Peaple, PLSA

Nigel Peaple, director of policy and advocacy at PLSA, said: “CDC blends some of the desirable elements of defined benefit, such as clearer target outcomes for the saver, and defined contribution schemes, such as predictable contributions for employer and member.

“By combining the risk of longevity with the ability to invest money over a longer period of time, CDC has the potential to offer new and better approaches to benefits.

“There are of course challenges, including how to ensure savers understand the variety of benefits, and ensuring new models can deliver in practice once reservation and regulation are 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 a package of potential design principles and approaches to accommodate new types of CDC arrangements.

CDC authorization and ongoing supervision will be administered by the Pensions Regulator.

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