"The introduction of multi-employer whole-of-life CDC scheme regulations will be a landmark moment for UK pensions. "
- Andy O’Regan, client and strategic partnerships director at TPT Retirement Solutions
The Department for Work and Pensions has today unveiled plans "to modernise pensions and give workers greater security in retirement" by launching a consultation into extending Collective Defined Contribution (CDC) pension provision.
CDC pension schemes, first introduced to the UK in 2022, pay out a regular income from a collective fund rather than producing an individual 'pension pot'.
The government says it is "fast-tracking plans to modernise its pensions system" by broadening access to Collective Defined Contribution schemes.
Currently only single or connected employers can set up CDC schemes, with the first scheme launched by the Royal Mail yesterday. The Government is now seeking to allow multiple employers to share a scheme, which could lead to more firms adopting this system.
In a statement, the government said millions of workers would benefit from the changes, adding that the regulations "form part of wider plans for future of workplace pensions to help increase returns for more people and ensuring greater value for money".
In Canada, the funds from pooled pension contributions are invested into a wider range of assets like infrastructure, startups and private equity – which can benefit the wider economy and boost returns.
Andy O’Regan, client and strategic partnerships director at TPT Retirement Solutions, said: "The introduction of multi-employer whole-of-life CDC scheme regulations will be a landmark moment for UK pensions. Previously, CDC schemes had only been viable for the largest employers. These new rules will make it possible for all employers to provide their staff with a CDC pension scheme. We’ve already been speaking to around 200 employers who have expressed interest in how a CDC scheme could be delivered for their employees.
"Multi-employer CDC schemes have the potential to bring a host of advantages to pension savers when compared to traditional DC schemes. CDC schemes pool longevity and investment risk. This means that, compared to DC, they are expected to achieve higher benefits as well as provide members with an income for life. An added benefit is the removal of some of the complex financial decisions pension savers are required to make under DC. CDC schemes may also be more likely to invest in productive assets which could encourage economic growth and generate higher long-term returns for scheme members.
"This consultation will open the door to CDC for all employers regardless of size, with the first multi-employer CDC scheme potentially launching within a couple of years. We believe many employers, pension savers, and the wider economy could benefit from the introduction of these schemes. We look forward to responding to this consultation in due course."
Gary Smith, financial planning partner and retirement specialist at Evelyn Partners, commented: “As well as promising to deliver better outcomes for pension savers, this initiative is also aimed at ‘supporting the Government’s growth mission’ by getting pension funds to invest more in UK companies and infrastructure initiatives. Currently of the £830billion in UK pensions only 4.4% is invested in domestic equities, partly because investors have been put off by their lacklustre growth of recent years.
“The CDC idea can seem attractive as a bridge between the old gold-plated defined benefit schemes, which are now all-but extinct in the private sector, and the defined contribution schemes that the vast majority of private sector employees are now members of - and auto-enrolled into when they join a new company.
“CDC schemes are similar to DB schemes in that one big investment fund is managed to pay target pension incomes to its retiring members, but crucially that income is not guaranteed. Which means they aren’t ‘gold-plated’, in that members might end up with a lower income than they had expected if the fund’s investment returns underperform. In such a situation, how reduced incomes are applied to current rather than future retirees is a major question and one that will depend on how the scheme is run.
“These schemes in theory benefit from economies of scale, pooling of risk and professional investment management – but if they will have a weighting towards UK equities, start-ups and infrastructure investments then you’d need some faith that these investments would actually pay off. Compared to a traditional DC scheme, which has a choice of funds that members can funnel their own contributions into, it looks like savers into CDC would be surrendering quite a bit of control and choice over how their pension is invested.
“That might well suit some workers but in return for surrendering control they will probably want some assurance that their scheme will be a good performer. How that assurance can be provided – at least in a scheme’s early days – is unclear. From a recruitment perspective, if an employer solely offered a CDC arrangement then some workers who had strong preferences on how they wanted their pension to be invested might be put off joining.”
