Zarah ChoudharyFollowing Chancellor Rachel Reeve’s recent visit to Canada to see how retirement schemes successfully pool contributions from employees into larger funds, the Government has announced plans to fast-track the modernisation of the UK’s pensions system by broadening access to collective defined contribution (CDC) schemes.
CDC pension schemes, first introduced to the UK in 2022, enable savers to pool their money into a single fund to share investment risk and longevity risk.
From today (8th October), industry experts, savers and pension providers can have their say on proposals to extend the current offering of CDC pension schemes to more employers as part of a Government consultation.
In Canada, the funds from pooled pension contributions are invested into a wider range of assets like infrastructure, startups and private equity.
Minister for Pensions Emma Reynolds said: “We are seizing this exciting opportunity to modernise our pensions market to deliver better outcomes for millions of workers.
“People work hard to put money aside for their pension with every pay cheque.
“This significant innovation will offer a more predictable income and greater finance security for future pensioners.”
Currently only single or connected employers can set up CDC schemes, with the first scheme launched by the Royal Mail yesterday (7th October).
Compared to defined contribution (DC) schemes, CDC schemes 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.
The Government is now seeking to broaden access further by allowing unconnected multiple employer schemes, making this pension model more accessible to a wider range of businesses and employees.
This work builds on plans to review the pensions landscape as well as the Pension Schemes Bill, with further consolidation and broader investment strategies to possibly deliver higher returns for pensioners.
The consultation will gather views from employers, industry experts, pension providers and the public on draft regulations and their potential impact, closing on 19th November 2024.
John Ball, chief executive of the Church of England Pensions Board, said: “We welcome the publication today of draft regulations that support the creation of multi-employer CDC pension schemes.
“We look forward to scrutinising the detail, and to seeing how in due course, such an arrangement might transform retirement plans for those who work for the Church.”
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.”
David Brooks, head of policy at Broadstone consultancy, said: “Today’s consultation and the rhetoric from the Pensions Minister suggests CDC will be a core pension policy for the current Government.
“They seem clear that CDC could be an answer to many of the issues in the current pension system – including greater investment in the UK economy – and are looking to replace the reliance on individual Defined Contribution pots with pooling of Collective pots
“However, if CDC is to gain a foothold in the UK’s pension provision, then there has to be an allowance for unconnected employers to work together.
“If not, CDC will remain the domain of only the very largest employers.
“Embarking on another new model of pension saving will be an operational, accounting and financial challenge for many smaller employers who have just recently gone through the auto-enrolment reforms and there is uncertainty over how the partnership ‘club’ approach would work in reality.
“The design, regulation and authorisation of these schemes will also need to be implemented correctly, and the current consultation will form the bed rock of this.”
Nausicaa Delfas, chief executive of The Pensions Regulator, said: “Multi-employer CDC pension schemes offer the potential to deliver better outcomes for thousands of UK pension savers, turning a pension pot into a retirement income.
“I encourage industry to take part in the consultation and we look forward to working with Government to develop an appropriate regulatory regime.”
