A new type of pension scheme could help millions boost their retirement savings. The Government is looking to expand Collective Defined Contribution pensions (CDC).
Major Pension Scheme Changes Could Increase Retirement Savings for Millions
By Lydia Amazouz
Published on 9 October 2024 09:45
A big change to pension schemes could help millions grow their retirement savings. A new type of workplace pension, called Collective Defined Contribution (CDC), might be expanded soon.
New CDC Pension Schemes Aim to Boost Retirement Income for Millions
Right now, there are two main types of pensions offered by employers. The first is a defined benefit pension, which guarantees you a set income in retirement based on your salary. The second is a defined contribution pension, where the amount you get depends on how much you and your employer put in and how well the investments perform.
Defined contribution pensions let you save up a pot of money that you can use for income when you retire. CDC (Collective Defined Contribution) pensions work differently by combining everyone’s contributions into a shared fund. This pooled money is invested with the goal of making it grow over time, and workers are given a target income for their retirement. According to The Sun, UK companies have been allowed to offer CDC pensions since 2022.
Royal Mail has become the first company to launch a CDC pension scheme, and the Government is now looking to expand it further. A new consultation has been launched to explore how more businesses and employees can join.
Currently, CDC schemes are limited to single employers or groups of related companies. However, the Government is proposing to open these schemes up to multiple, unrelated employers, making them more widely accessible.
Pensions Minister Emma Reynolds said: "We are seizing this exciting opportunity to modernise our pensions market to deliver better outcomes for millions of workers.
"People work hard to put money aside for their pension with every pay cheque. This significant innovation will offer a more predictable income and greater financial security for future pensioners."
Consultation Aims to Improve Pension Options for UK Workers
A consultation is running until 19 November after Chancellor Rachel Reeves began reviewing pension schemes. The goal is to add over £11,000 to a typical pension fund.
Nausicaa Delfas, CEO of The Pensions Regulator, said that multi-employer CDC pension schemes could give better results for many UK pension savers by turning their savings into regular retirement income. She encouraged businesses to get involved in the consultation and said they’ll work with the Government to set up the right rules.
David Brooks, head of policy at Broadstone, said the consultation shows that CDC pensions could become a big focus for the Government. He explained that the Government believes CDC pensions could solve problems in the current system, like increasing investment in the UK economy, by pooling pension funds instead of keeping them as individual pots. He added: "However, if CDC is to gain a foothold in the UK’s pension provision, then there has to be an allowance for unconnected employers to work together. If not, CDC will remain the domain of only the very largest employers."
Steve Webb, who used to be a pensions minister and is now a partner at LCP, mentioned that these schemes could benefit people seeking more than just an individual savings pot for retirement, adding: "Similar schemes have worked reasonably well in other countries such as Netherlands, Scandinavia and Canada, though with local variations in exactly how they worked."