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Government to collectivise pension funds to ‘improve’ retirement incomes
Collective defined contribution (CDC) schemes could mean big changes to workplace pensions. Here’s what’s coming.
Pensions Minister Torsten Bell has announced the Government’s plans to legislate for so-called ‘collective defined contribution’ (CDC) pension schemes.
The Government will legislate to create collective pension schemes in the Autumn as it looks to improve pension outcomes for workers.
This will see pension funds from multiple employers pooled together into much larger pots. The Government says by increasing the size of the pension funds it spreads the risk and improves outcomes for members.
Minister for pensions, Torsten Bell, comments: “Success in the world of pensions isn’t just about getting people saving, it’s ensuring their savings work as hard as possible for them.
“Too often at present we are leaving individuals to face significant risks, about how their individual investments perform and how long their retirements last.
“Pooling some of those risks will drive higher incomes for pensioners and greater investments in productive assets across the economy.”
CDC pensions explained
Currently when an employee joins a company, they are auto enrolled into the company scheme. But the variety of choices, sizes and performance of these pensions are mixed.
Instead, the Government intends to launch so-called ‘collective defined contribution’ or ‘CDC’ schemes. Such schemes are much larger. This makes them more powerful and also more accountable with larger numbers of members reliant on positive outcomes.
Currently the only CDC scheme in the UK is run for Royal Mail employees. It has over 100,000 members and offers them a combination of cash lump sum and income for life in retirement.
The Government will set out new legislation in the Autumn to widen the reform to more employers and schemes.
It plans to offer members of such schemes products on retirement such as annuities as an option for a secure lifetime income instead of managing funds and savings independently once retired.
What collective defined contribution means for pensions
While there is no current indication of whether your pension will be affected by the collective defined contribution pension reforms, there are changes coming in this Parliament.
Workers will potentially see their pension funds moved into larger schemes, which could give them less control over their investments.
The trade-off here is more assurance that their savings are being invested fruitfully for the future – but this is by no means guaranteed.
CDC schemes will have more power to invest in long-term assets such as illiquid investments (such as infrastructure) and more UK-based investments. This is a part of the Government’s wider priority to see more savings invested locally in the UK to boost the economy.
Other types of pensions such as legacy final salary (defined benefit) and private pensions such as self-invested pension pots (SIPPS) will be unaffected by the reform.
