Millions of workers could eventually benefit from better retirement savings when a new type of pension scheme is introduced to the market, according to the Department for Work and Pensions (DWP).
Secretary of State for Work and Pensions Amber Rudd has backed plans for the first Collective Defined Contribution (CDC) scheme in the UK after the pensions industry, insurers and other bodies, welcomed the move proposed by Royal Mail and the Communication Workers Union (CWU).
Rudd said: “Introducing a completely new pension scheme to the market is yet another revolutionary reform in this government’s quest to transform the retirement saving culture in this country.”
She added: “Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industry to enhance the prospects of millions of workers.”
The government said that the benefits of CDCs are clear: Members get more certainty in their retirement, with regular pay-outs from their scheme and, unlike traditional final salary pension schemes, those pay-outs aren’t affected if your employer goes under.
CDC pension schemes offer a regular retirement income by allowing group contributions to be pooled together and invested to give members of the scheme a higher final benefit level. It also means much better long-term protections for members because risk is shared.
The new schemes are expected to appeal to companies who want to offer strong pensions provisions to employees without having to hang on to enormous pension liabilities.
The government has worked closely with Royal Mail and the CWU to develop the proposals which went out to consultation in November.
The consultation response confirmed primary legislation will be brought forward to introduce CDCs as soon as parliamentary time allows.
More than 70 of the contributors to the consultation urged the government to make the new type of scheme widely available, including through multi-employer pensions and those run by commercial Master Trusts – potentially reaching millions of retirement savers.
DWP said protections will be built into the system to ensure fairness for both younger and older CDC pension scheme members, the consultation response asserts. Trustees of CDCs will be required to spell out the potential for fluctuations in pay-outs – depending on investment performance – to members at the outset.