The government's consultation on rules for collective defined contribution schemes has been received as a welcome step forward, but experts cautioned that initial demand was likely to be low due to restrictive conditions and high costs.
The Pension Schemes Act 2021 provided the legislative framework required to establish and operate CDC schemes, reviving a concept first proposed in 2015.
CDCs are a type of money purchase provision, new to the UK but already established in other countries, which can be established under trust by a single employer or a group of connected employers.
In a CDC scheme contribution rates for employers and employees are set in advance, and members pool investment and longevity risk.
CDC schemes provide income in retirement, though the rate of increase varies and pension reductions are possible in certain circumstances.
In his foreword to the consultation, pensions minister Guy Opperman explained that CDC schemes have long been seen "as a third way between traditional final salary schemes that are guaranteed by employers, and individual defined contribution schemes where investment and longevity risks are born by the individual members.
“One of the benefits of offering CDC benefits is that members do not have to make once-and-done decisions about what to do with their pension pot, as by default a CDC scheme will deliver a pension in-house,” he said.
CDC schemes have greater potential than DC schemes to invest in illiquid assets such as infrastructure, he continued, and “recent studies have shown that a well-designed and well-run CDC scheme can also be resilient to sudden changes in market conditions, such as we have seen during the current pandemic”.
The purpose of the new regulations was to provide confidence in the CDC model, he said, and while for the time being the government’s priority was to “ensure the full framework for single employers and connected multi-employer CDC schemes is in place as soon as we can,” he added the government was “not deaf” to those who “wish us to go further”.
Rollout expected to be limited
Though it constitutes progress, the proposed regulations only allow for the creation of CDC schemes in a limited set of circumstances.
Tim Middleton, director of policy and external affairs at the Pensions Management Institute, said initial demand was likely to be low, “because they're only allowing large single-trust schemes to be established.
“The number of scheme sponsors who would be in a position to do this is small. So there's not going to be a huge take-up outright because the initial audience is very restrictive,” he said.
Postal workers were the first to sign up after Royal Mail and the Communication Workers' Union backed the creation of a CDC scheme in October last year following the 2018 decision to close the Royal Mail defined benefit scheme. Some 141,500 Royal Mail employees are expected to join the new pension fund.
Under the terms of their arrangement, members — auto-enrolled in a similar manner to DB and traditional DC schemes — will contribute 6 per cent of pensionable pay while Royal Mail will contribute 13.6 per cent. Members will also benefit from a lump sum at retirement.