CDC pension schemes: the next big thing in UK pensions?

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In November the Work and Pensions Committee launched an inquiry into an interesting - but remote - prospect in the world of pensions.

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Inquiry: Collective defined contribution pension schemes
Work and Pensions Committee

Collective defined contribution pension schemes
Defined contribution pension schemes would be a new and different kind of retirement saving for the UK – already in use in the Netherlands and Norway – but would require new legislation to bring into effect and until recently there was not much impetus, from Government or the private sector, to make that happen.

However, with a deal finally hammered out between Royal Mail and the CWU just this month, after major negotiations over employment conditions and benefits to avert strike action last year, collective defined contribution (CDC) pension schemes in the UK are suddenly more of a real possibility.

Also known as a form of "defined ambition" scheme, they differ from Defined Benefit (DB) schemes in that members are not promised a certain retirement income. As we are seeing often (and the Committee regularly investigates such cases), the company sponsors of DB schemes are not always willing or able to maintain those promises. That is one of the problem CDC pensions aim to address.

A CDC scheme instead has a target or "ambition" amount it will pay out, based on a long term, mixed risk investment plan. CDCs aim to pay out an adequate level of index-linked pension for life but this is an ambition rather than a contractual guarantee. They have the scope to redefine the benefits they offer if circumstances - like adverse economic conditions - require.

Regular retirement income
CDC differs from the traditional Defined Contribution (DC) schemes that are largely replacing DB schemes in that it does not produce an individual "pension pot", which you then have to decide how best to use for your retirement, but pays out a regular retirement income from the collective fund.

Thus, CDC schemes take the big central decision of pension freedoms out of retirement planning, and also much of the risk. How this model could work within a pensions landscape increasingly based around personal freedom and choice will be one of the main strands of the inquiry.

Witnesses
Wednesday 21 February, Wilson Room, Portcullis House

At 9.30am

Experts on the legal and financial structures required to make CDC pensions work:

Nathan Long, Senior Pensions Analyst, Hargreaves Lansdown
Sandeep Maudgil, Partner, Slaughter and May
David Pitt-Watson, Executive Fellow, London Business School
Hilary Salt, Senior Actuary, First Actuarial
At approx. 10.15am

Organisations who might pioneer this type of pension saving in the UK:

Jon Millidge, Group HR Director, Royal Mail Group
Ray Ellis, National Officer, Communication Workers Union