New type of Pension scheme ruled out
The government has given the go-ahead for a new type of pension scheme that promises to reduce the burden on employers while giving workers a better retirement by pooling the risk of their investment.
The Pensions minister approved the Royal Mail to launch the UK’s first collective defined contribution (CDC) scheme. The Government said the new scheme would offer less risk to individuals than defined contribution (DC) schemes, while putting less of a burden on employers than defined benefit (DB) schemes.
CDC pensions will be offered to workers at Royal Mail – which has spent the last 18 months drawing up the plans alongside the Communication Workers Union (CWU) – before being rolled out to other companies and sectors.
However, industry experts said the proposed legislation enabling the move was “very narrow in scope” and left many questions unanswered. Based on pension schemes widely used in the Netherlands and Denmark, colleagues’ CDC contributions are pooled together and invested in a bid to give members a higher payout.
In common with defined contribution schemes, CDCs pay out from their own assets – protecting members from balance sheet fluctuations, while avoiding employers having to administer schemes on behalf of their employees – while the process of pooling investments aims to reduce members’ individual risk.