Home / Royal Mail / Pension: Collective defined contribution plans will be ‘very popular’ – what are they? | Personal Finance | Finance

Pension: Collective defined contribution plans will be ‘very popular’ – what are they? | Personal Finance | Finance

Pension accounts across the board may be changed in the coming months and years according to a new “landmark” pension bill that’s been pushed through the government. The new bill is primarily focused on changing the ways in which pension schemes are invested and managed, in an attempt to make them more environmentally sustainable.

The bill will soon be introduced to the House of Commons and may soon create an environment which holds pension managers to account.

While management of pensions may be the primary focus of the bill, it should be noted that it also paves the way for a new type of pension to be introduced.

As the announcement from the government detailed: “The Bill will also legislate for the creation of a new style of pension scheme.

“Collective Defined Contribution (CDC) schemes have the potential to increase returns for millions, while being more sustainable for workers and employers.”

READ MORE: Retirement warning: Your pension may be raided to cover COVID debt

“The CDC approach increases investment leverage for savers, and helps members secure a regular income in retirement at lower cost.

“For employers, CDC, like DC, provides stability and predictability in their obligations to the pension scheme.

“Therefore, CDC helps improve retirement outcomes for members whilst also benefiting employers.

“In that spirit, Royal Mail and the Communication Workers Union have proposed a CDC pension scheme in the belief that this will be advantageous to both the employees and the business. This is a start and will provide a firm footing for further innovation in pensions.”

The recent bill caught the attention of many experts within the field and “Over 50s Money” explored the downsides of existing DC and DB schemes which necessitates the new alternative: “The Bill introduces a new type of pension, Collective Defined Contribution (CDC) schemes.

“This aims to address the difficulties with the two existing workplace pension’s frameworks.

!Currently schemes are either Defined Benefit (DB) or Defined Contribution (DC) schemes. There are downsides to both of these: DC schemes may give a less predictable retirement income for scheme members and DB schemes can create significant risks to the employer.

“In CDC schemes, both the employer and employee would contribute to a collective fund from which retirement incomes are drawn. The funding risk would be borne collectively by the individuals whose investments make up the fund. Similar to a DC scheme, the employer carries no ongoing risk.

“CDC schemes would offer a target income at retirement rather than a specified income like a DB scheme. If the scheme is under (or over) funded then the level of member benefits can be adjusted to ensure the assets of the collective fund are equal to the liabilities relating to the target incomes.”

Paul Green the Founder and CEO of the organisation commended the new legislation, noting that new Collective Defined Contribution are likely to become very popular.

As Paul concluded: “This is an important piece of legislation that changes the pension landscape in the UK.

“The new Collective Defined Contribution (CDC) schemes make sense.

“They address the problems with the current options and we expect them to become very popular.”




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