Collective defined contribution (CDC) schemes could signal a new era for the welfare state, and “transform the UK private pensions landscape” according to the Work and Pensions Committee’s latest report.
The findings come following a ground-breaking agreement between Royal Mail and the Communication Workers Union earlier this year. This deal saw the two parties agree to a ‘cash balance’ pension scheme to replace the defined benefit (DB) fund.
Commenting on the arrangement, the Committee said that “As well as being a model of constructive industrial relations, it opens the door for CDC to move from abstract idea to practical reality.”
In response, ministers are now urging the Government to move quickly to enable the creation of the UK’s first Collective Defined Contribution pension scheme.
Such pension schemes are already in use in the Netherlands and Norway. However new legislation would be needed to make them a reality here in the UK. While there hasn’t been much impetus to make this happen until now, the Royal Mail and CWU deal mean that the next great pension revolution is now looking increasingly likely.
A defined benefit (DB) pension is one where the amount paid out is based on how many years an individual has worked for an employer and the salary they earned. So with DB, members are promised a guaranteed retirement income. However, DB pension schemes are in decline due to massive high-profile deficits and challenging employer funding obligations.
In response, defined contribution (DC) schemes are on the rise under automatic enrolment. With DC, money paid in by you or your employer is invested by the pension provider, and the value of your pension pot can go up or down depending on how the investments perform. However, individual DC schemes put the onus on savers to consider how best to manage investment and risk.
With a CDC, rather than producing an individual pension pot, the scheme pays out a regular retirement income from a collective fund. Fluctuations in the scheme’s value are addressed by adjusting the benefits paid, rather than calling on additional contributions from the employer, and the pot is managed collectively on behalf of all members. As such, CDC is being seen as a solid middle-ground that meets the needs of savers and employers alike. Especially as studies show that – through risk-pooling – such schemes could offer more generous and predictable benefits than DC.
Frank Field MP, chair of the Work and Pensions Select Committee, said: “The idea of a ‘new Beveridge’ has been overused and under-delivered during most of the welfare state’s life. But the report published today by the Select Committee offers that opportunity for pensions: how to combine decades of individual pension ownership and provision with collective security.”
The Government has indicated that it will look at facilitating CDC for Royal Mail in a way that will enable other businesses to follow suit. However, the Committee has called for a swift timetable for authorising CDC schemes in the UK.
