- Wide reaching reforms to make innovative “collective” pension funds more commonplace will reduce risk and volatility for savers.
- Collective Defined Contribution (CDC) schemes pool investment and longevity risks, unlocking productive investment potential as well as supporting more predictable returns for savers at no extra cost for employers.
- With new regulations to allow for multiple employer CDCs planned for the Autumn, more savers are set to benefit from CDCs as part of the Government’s Plan for Change.
More people than ever are saving into a workplace pension – £28 billion more in 2020 than in 2012 – with most of these pension pots being Defined Contribution (DC) schemes, where the employee is automatically enrolled to save a proportion of their salary tax-free and the employer contributes at least 3% of their salary to the pot too.
But a lack of innovation and reform of the DC savings landscape risks some future pensioners bearing large risks, in terms of the value of their investments and whether their savings will provide an income throughout their retirement.
Collective Defined Contribution (CDCs) are a new type of pension scheme that sees both the employer and employee contribute to a collective fund. Due to the scale of these funds and the pooling of risk for members, they can aim to provide a target pension income for life – similar to Defined Benefit (DB) schemes, sometimes called an average or final salary pension, but without the risk of significant unexpected bills for employers.
In the UK, Royal Mail have already launched a CDC scheme for their employees which has over 100,000 members who are offered a combination of a cash lump sum and an income for life in retirement.
Speaking at the LCP Conference in London today, the Minister for Pensions confirmed new regulations, set to be laid in the Autumn, will allow for multiple employer CDC schemes to be established, so that a range of unconnected employers can pool their employees’ pension pots into a collective fund, boosting returns for savers.
These pooled pension investments will mean higher incomes in retirement, and help individuals manage the uncertainty about how long that retirement will be. These measures will provide more options for savers and employers to choose between and are part of wider reforms to the pensions landscape, as part of our Plan for Change to put more money into people’s pockets.
Minister for Pensions, Torsten Bell said
Success in the world of pensions isn’t just about getting people saving, it’s ensuring their savings work as hard as possible for them.
Making sure more employers and savers have the option of an innovative Collective Defined Contribution Pension scheme is an important part of making that happen.
Too often at present we are leaving individuals to face significant risks, about how their individual investments perform and how long their retirements last. Pooling some of those risks will drive higher incomes for pensioners and greater investments in productive assets across the economy.
The Minister also confirmed his desire to deliver decumulation only CDC schemes. These schemes would allow certain savers with DC schemes to access CDCs, offering retirees the chance to buy longer term, pooled retirement products that deliver stability for pensioners.
Modelling from the PPI suggests that single employer CDCs could deliver a significantly greater average replacement rate (47%) than currently delivered through annuities (40%) with even higher benefits seen for multi-employer CDCs as longevity risks are pooled. (69%).
And due to their size, CDCs can also be a more efficient vehicle for economic growth, with similar collective funds in Canada and Australia having proved an efficient way of supporting economic growth, investing in a wider range of sectors and assets.
CDC schemes can invest in illiquid and more productive investments over the long term, including in UK businesses and infrastructure projects, supporting the Government’s growth mission while providing employers with greater freedoms as well as reducing the risks of over or under spending in retirement by paying pensioners based on life expectancy.
These measures aim to drive economic growth and improve retirement outcomes for working people as part of the Plan for Change.
Today’s announcement will provide clarity to the industry ahead of the upcoming Pensions Investment Review and Pension Schemes Bill, and in time give working people and employers a new option when considering what pension scheme works best for them
Additional Information
- The Pensions Investment Review interim report sets out proposals which the government has consulted on to deliver scale and consolidation of the Defined Contribution (DC) market and the Local Government Pension Scheme in England and Wales (LGPS). The report can be viewed here Pensions Investment Review interim report – GOV.UK
- The government plans to introduce legislation in Autumn 2025, and subject to parliamentary approval, intends to bring the legislation and an updated Regulator’s Code into force as soon as practicable.
- The government will continue to work with industry stakeholders to develop decumulation CDC.
- The UK’s first CDC scheme, the Royal Mail Collective Pension Plan launched in 2024 which was a truly landmark moment for the UK pension landscape.
- There are now several organisations are actively looking to set up an unconnected multiple employer CDC scheme.
