Consultation opens on expanding CDC pensions

The government has launched a consultation on introducing legislation that would expand the scope of collective defined contribution (CDC) pension schemes.

CDC pensions, also known as “Dutch style” pensions as they are popular in the Netherlands, are a middle ground between defined benefit (DB or final salary schemes) and defined contribution (DC) schemes.

DB schemes, which offer predictable payouts at the end of the scheme, are now generally closed to new members in the private sector, with many employers favouring DC schemes, where payouts are based on the investment performance of contributions.

A CDC scheme has a target or ambition of what it will pay out, offering an element of risk-sharing between employer and employee and an extra level of guarantee for employees.

Royal Mail introduced the UK’s first CDC pension scheme yesterday, and will provide more than 100,000 employees with both an income in retirement and a lump sum.

Although CDC pensions have been authorised in the UK since 2021, Royal Mail is so far the only company to announce plans to launch one.

The consultation, which runs until 19 November, seeks employers’ views on draft legislation that would extend access to these schemes, setting out what they must do to become authorised and to operate effectively.

One idea is if companies “club” together to produce large CDC schemes, this could mean more investment is channelled towards UK infrastructure and start-ups. However, companies would need more detail on how this would work in practice and what protections might be offered.

In August, there had been speculation that the Treasury could look into a Canadian pensions model, which consolidates a number of smaller public sector pension schemes into a “giant” pension fund that would reduce administration costs and potentially attract external investment.

Research by Willis Towers Watson in 2020 found that CDC schemes could deliver annuities on average 70% higher than DC schemes and 40% higher than DB schemes.

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