A new type of occupational pension scheme which pools workers’ investments into one super-sized pot has been given the green light by the Government.
Pensions Minister Guy Opperman has announced that collective defined contribution (CDC) pensions will be brought forward.
The Government is now consulting on how such schemes, which are used in the Netherlands, could work in Britain.
The consultation applies to England, Wales and Scotland. It is envisaged that Northern Ireland will make corresponding legislation.
Officials at the Department for Work and Pensions have been working with Royal Mail and the Communication Workers Union (CWU) to develop proposals for the introduction of CDCs.
The security provided by the large scale of such schemes could help to lead to more stable pension incomes.
As well as cutting administration costs, another potential benefit is that risks such as life expectancy and how long someone will need their pension for can potentially be pooled across a large group of thousands of pension savers.
The consultation will help to flesh out the details of exactly how such schemes could work and it is understood they will be brought in when parliamentary time allows following the consultation.
Currently, workers tend to have a defined benefit (DB) pension, which offers savers a guaranteed level of income when they retire such as a final salary pension – or, increasingly likely, a defined contribution (DC) pension, where the individual saver bears the risk of how much money they will eventually end up with in retirement and how well their investments perform.
DB pensions have become increasingly thin on the ground as people live for longer and firms find it difficult to meet their pension promises.
With the new type of CDC pension, payouts could be made to savers at a level agreed by trustees – potentially offering a middle ground option between DB and DC schemes.
The Government said the new schemes will be strictly regulated and required to undertake an annual, independent valuation to protect savers.
To protect the investments of members and ensure costs are controlled, all CDC pension schemes will be subject to a charge cap of 0.75% – set at the same level as DC pension schemes.
Mr Opperman said: “Collective defined contribution pension schemes are an important innovation which will provide more choice and flexibility for pension scheme members and employers.
“I’m grateful to Royal Mail and the Communication Workers Union for their assistance in getting us to this point.
“It’s important we get this right, which is why we’re consulting on the detail of our proposals before bringing legislation forward. I want to hear the views of the pensions industry as we prepare to introduce CDC pension schemes.”
Jon Millidge, chief governance and risk officer, Royal Mail Group, said: “We are delighted that the Government has launched a formal consultation on enabling collective defined contribution pensions in the UK.
“Earlier this year, Royal Mail and the CWU reached agreement to introduce a CDC scheme subject to the necessary legislative and regulatory changes being made.
“The consultation launched today is a major step forward in our campaign to allow us to offer a CDC scheme for our 141,000 employees as soon as possible.”
Terry Pullinger, deputy general secretary postal, CWU, said: “We very much welcome this significant milestone announced by the minister.”
Sir Steve Webb, a former pensions minister who is now director of policy at Royal London, said new pension provision models which could help give greater certainty to workers about their future pensions would be welcome.
He continued: “But the fact that the Government is only now launching a consultation which will run into 2019 means that we are probably many years away from such models becoming a reality on the ground.
“Appetite for such schemes is likely to come initially from employers still running defined benefit schemes and looking for a ‘half-way house’ solution if they are finding DB schemes too expensive. Relatively few employers any longer fit that description.”
David Willetts, executive chair of the Resolution Foundation think tank and chair of the Intergenerational Commission, said: “One of the ongoing challenges from employers moving from defined-benefit to defined-contribution schemes is that individuals bear too much of the risk, from the ups and downs of investments, to the uncertainty of how long each of us will live.
“Collective defined-contribution pensions can help reduce these risks, ideally as part of a wider package of reforms, so the Government’s move to encourage the development of these schemes is very welcome.
“While few Millennials today will be aware of what a CDC pension scheme might entail, many may well be grateful for innovations of this type when they approach the end of their working lives.”
