November 2018
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DWP consults on collective workplace pensions that ‘target’ rather than guarantee income

8 November 2018

The Department for Work and Pensions has launched its long-awaited consultation on collective defined contribution schemes, a new form of pension fund which could be introduced in the UK. 

CDC pension schemes allow contributions to be pooled and invested to give members a target benefit level on what they will receive on retirement. They differ from defined contribution schemes because they do not produce individual savings pots; instead, savings are invested in a large collective pot shared by all members.

CDC also differs from defined benefit schemes because they do not guarantee a particular income, but offer a target amount they will pay out.

In its consultation paper, the DWP said the new scheme would enable employers to offer employees an income in retirement, but without the risks and balance sheet impact of sponsoring a defined benefit scheme.

The consultation sets out proposals as to how such a scheme, which is widely used in the Netherlands, Denmark and parts of Canada, would work in the UK, and the legislative and regulatory regime that would be needed to support such a scheme.

Steven Cameron, pensions director at Aegon, said: “The consultation will hopefully bring some rigour and logic to the debate, exploring where CDC might appeal to employers and benefit members, while also facing up to the many financial and communication challenges it poses.”

One of the key features of a CDC scheme is the cross-subsidy across and between generations. However, Cameron said employers considering offering a CDC scheme will need to be sure current and future employees know that younger generations may be required to bail out older generations in certain circumstances.

Tom Selby, senior analyst at AJ Bell, said: “It’s clear from the DWP’s preference not to allow so-called capital buffers – where funds are built up in reserve to make payouts more predictable – and the proposed removal of any trustee discretion in adjusting benefit levels that concerns about intergenerational fairness in CDC are front-and-centre of ministerial minds.”

By suggesting any outperformance or underperformance should be reflected in the benefits paid to all members – including those already receiving their pensions – the DWP is committed to not allowing schemes to be skewed in favour of one cohort of members over another.

However, Selby warns that “this fairness will potentially make outcomes in CDC less predictable and raises the spectre of pension cuts should investments consistently underperform over a long period of time.”