Huge pension scheme change could boost retirement savings for millions

Collective Defined Contribution is a new type of workplace pension
-Credit: (Image: Reach Publishing Services Limited)


A huge change to pension schemes could boost the savings for millions. Collective Defined Contribution (CDC) is a new type of workplace pension which could soon be expanded.

There are currently two main types of pensions available through employers - defined benefit and defined contribution. Defined benefit pensions pay you a guaranteed income in retirement based on your salary.

Defined contribution pensions allow you to build up a pot of money and take an income from it after you stop working. CDC pension schemes are where contributions are pooled together into a collective fund and invested, with the aim of growing this money over time.

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Workers are then given a target pension income for retirement, The Sun reports. UK companies have been able to offer CDC pensions since 2022.

Royal Mail this week became the first company to launch one. Now, the scheme could be expanded after the Government launched a new consultation.

It is proposing access be broadened by allowing a wider range of businesses and employees to sign up. Currently, CDC schemes can be set up by single employers, for that employer only, or, for employers in the same group of companies.

But the Government wants schemes to be open to multiple, unconnected employers, making the schemes more accessible. Pensions Minister Emma Reynolds said: "We are seizing this exciting opportunity to modernise our pensions market to deliver better outcomes for millions of workers.

"People work hard to put money aside for their pension with every pay cheque. This significant innovation will offer a more predictable income and greater finance security for future pensioners."

A consultation is running until November 19. It comes after Chancellor Rachel Reeves launched a review of pension schemes aiming to add more than £11,000 extra to a typical retirement pot.

Nausicaa Delfas, chief executive of The Pensions Regulator, said: "Multi-employer CDC pension schemes offer the potential to deliver better outcomes for thousands of UK pension savers, turning a pension pot into a retirement income. I encourage industry to take part in the consultation and we look forward to working with Government to develop an appropriate regulatory regime."

David Brooks, head of policy at independent consultancy Broadstone, said: "The consultation and the rhetoric from the Pensions Minister suggests CDC will be a core pension policy for the current Government. They seem clear that CDC could be an answer to many of the issues in the current pension system – including greater investment in the UK economy – and are looking to replace the reliance on individual DC pots with pooling of collective pots.

"However, if CDC is to gain a foothold in the UK’s pension provision, then there has to be an allowance for unconnected employers to work together. If not, CDC will remain the domain of only the very largest employers."

Steve Webb, former pensions minister and current partner at LCP, said: "In principle, these schemes could be good news for people who are looking for something more than an individual pot of money which they have to manage at retirement.

"Similar schemes have worked reasonably well in other countries such as Netherlands, Scandinavia and Canada, though with local variations in exactly how they worked."