How will collective defined contribution pensions work?

These pensions promise higher returns and lower risks, but will they boost your savings? Rebecca Goodman investigates. 

6 minutes

  • Collective defined pensions could be coming to the UK
  • Savers’ money is pooled together in a CDC
  • Do you need a CDC pension and how do they compare to existing schemes?

Could a Collective Defined Pension be right for you?

Collective defined pensions could be coming to the UK

A new pension scheme, known as a collective defined pension (CDC), could be made available to retirement savers.

These schemes are popular in the Netherlands and have also been called ‘the peoples’ pension’ because of the way they are structured.

Everyone who signs up to a CDC puts their money into a collective pool, which is then invested as one.

The idea behind CDCs is that because the money is invested collectively, there is less risk to individual savings pots. The money is also able to be invested in a wider-range of assets at a lower cost, which could lead to higher returns.

However, instead of receiving a guaranteed sum of money in retirement, savers are instead given a target amount, which will depend on how many people are in the scheme, how much money is in the pot, and how well investments perform.

These schemes are seen as a combination of the current two major pensions in the UK. These are final salary schemes, which are now extremely rare, and the less generous but more popular defined contribution schemes.

A consultation was launched by the Government in November to look into how CDCs work and if they are a viable option for UK savers.

On launching the consultation, Guy Opperman MP, parliamentary under-secretary of state for pensions and financial inclusion, said: “The UK has a world-class occupational pension system – but I believe that there are always opportunities for further innovation which can be made for the benefit of savers and business alike.

“A robustly designed and appropriately regulated CDC regime is one such opportunity.”

How will savers’ money be invested in a CDC

Anyone who signs up to a CDC will have their savings pooled together and this is invested collectively.

How the collective fund of money performs will directly affect how much money the savers gets on retirement and they are given a predicted amount based on this.

The pension pot is invested in a wide-range of assets at a lower cost than an individual would pay because the cost is shared among members of the scheme.

Members of a CDC are not able to pick their own investments and they won’t get a choice of how to convert the money into an income when they retire.

How do CDCs compare to existing pension schemes?

Final salary schemes, which are extremely rare, provide a set level of income in retirement which is usually calculated by looking at the employee’s salary and the number of years they have worked.

Defined contribution schemes are usually made up from employee and employer contributions, and workers are in control of what their money is invested in and how they receive this when they retire. These are the most popular types of pension around and have been largely adopted by UK companies with the introduction of auto-enrolment.

CDCs are being seen as a combination of these two schemes. They are expected to offer a lower risk way for savers to invest their pension pots with less cost to employers than final salary schemes.     

Do you need a CDC pension?  

At the moment in the UK CDCs are in the consultation stage so it could be a very long time before they’re available to savers.

Royal Mail has come forward and said it will adopt the scheme for its workers but it is the only company at the moment to do so.

On the announcement, Jon Millidge, chief governance & risk officer, Royal Mail Group, said: “As the provider of around one in every 190 jobs in the UK, Royal Mail is committed to delivering the best possible pension arrangements for our people.

“We believe CDC is a progressive option which meets our objectives of providing sustainable, affordable and secure future retirement arrangements.

"Royal Mail and the CWU want to see CDC become a reality in the UK, and we hope the required legislation will be introduced at the earliest opportunity.”

The kind of pension a saver chooses is dependent on lots of different things including: their employment status, their employer, how much they earn, and their attitude to risk.

Therefore, it’s extremely important to seek independent advice before taking out a pension and to find out as much information as possible to make sure you’re making the best decision for you.

If CDCs are introduced, they will provide another option for savers to consider, but this isn’t expected to happen any time soon.