Defined Contribution  

MPs to probe pushing collective pension schemes

MPs to probe pushing collective pension schemes

The work and pensions select committee has launched a consultation into so-called collective defined contribution (CDC) pension schemes.

This type of retirement savings plan has the “potential to address some of the concerns that policy makers and the public have about the current pension offer", the committee said.

They are not yet allowed in Britain but have been widely used in the Netherlands, Canada and Denmark.

The Pension Schemes Act 2015 created by the 2010 to 2015 coalition government defined "shared risk/defined ambition" or collective defined contribution as a distinct pension category.

However, regulations under the act to bring them into effect have not yet been introduced.

In October 2015, the government announced the plans would be shelved indefinitely so as not to distract from other major reforms such as auto-enrolment and pension freedoms.

The schemes are also known as a form of "defined ambition" scheme and differ from defined benefit (DB) schemes in that they do not guarantee certain incomes in retirement.

Instead, collective defined contribution schemes have a target or "ambition" amount they will pay out, based on a long term, mixed risk investment plan.

They also have the scope to redefine the benefits they offer if circumstances - like adverse economic conditions - require, the pensions committee stated.

Collective defined contribution schemes differ from the traditional defined contribution (DC) schemes in that they do not produce individual pension pots, they invest savings in larger collective pots instead, which then provide an income to individuals during their retirement.

According to the committee collective schemes take “the big central decision of pension freedoms out of retirement planning, and also much of the risk”.  

Collective defined contribution schemes are also considered a potential source of investment for projects including infrastructure, as alluded to by chancellor Philip Hammond in this week’s Autumn Budget, when he said he wanted to "unlock" investment from pension funds.

The pensions committee wants to figure out the role 'defined ambition' collective defined contribution schemes could play in the pension landscape, the potential benefits to savers and the wider economy, and the legislative and regulatory framework that would be required to make it work.

The probe forms part of its ongoing inquiry into pension freedoms, which, it said, “has highlighted the general level of mistrust and disengagement with pension plans”.

Advocates of collective defined contribution schemes have told the committee the vehicles provide greater assurance of retirement income and more efficient pooling of costs and risks among members than traditional DC, while not imposing pension promises on employers.

Studies by RSA and Aon Hewitt estimate that collective defined contribution schemes could have delivered 33 per cent better pension outcomes than traditional defined contribution plans over the past half-century, the committee stated.

On the other hand, detractors have told MPs that collective defined contribution schemes may further fragment the pension landscape, suffer from lack of demand and run counter to the trend towards greater individual freedom and choice in pensions.