The Work and Pensions Select Committee is urging Government to move quickly to enable the creation of the UK’s first Collective Defined Contribution pension scheme, following the ground breaking agreement between Royal Mail and the Communication Workers Union.
Defined benefit (DB) pensions schemes are in decline as employers seek to reduce their exposure to ongoing funding obligations and massive scheme deficits have featured in a series of high-profile corporate failures, including those such as BHS and Carillion that have been investigated by the Committee.
Individual defined contribution (DC) saving is growing fast under automatic enrolment, but while DC pensions are more manageable for employers, they require individual savers to consider how to manage investment and actuarial risk.
CDC pensions by contrast offer advantages in the middle ground. These schemes, which are already prominent features of highly successful pensions systems in Denmark and the Netherlands, offer a regular retirement income but in the form of a target benefit rather than DB schemes’ “guarantee”. Changes in the funding position of the scheme are addressed by adjusting the benefit rather than calling on extra contributions from the employer.
There are both pros and cons to this type of pension scheme with some critics suggesting that the collective approach of CDC runs counter to the spirit of pension freedoms, however, it can also be regarded as adding a further attractive pension choice to the mix, potentially providing a further boost to pension saving.
The Government has indicated that it will seek to enable CDC for Royal Mail in a way which will allow other companies to follow suit – the Committee supports this and says Government should set out a swift timetable for enacting CDC schemes in the UK in its response to this report.
You can read the full Work and Pensions Committee report here.