Collective Defined Contribution Schemes: A Fresh Alternative?
The government has given the green light to a new form of defined contribution pension scheme. At least, it is new to the UK. “Collective defined contribution” (“CDC”) schemes are common in the Netherlands and Denmark but the idea of introducing this type of scheme into the UK has only relatively recently gained traction. The fact that the Royal Mail wants to put such a scheme in place for its 140,000-strong workforce has provided the impetus for the government to consult on how CDC schemes would operate and be regulated.
CDC schemes are likely to be good news for employers. Like individual DC schemes, the employer pays fixed contributions and does not bear the risk of any shortfall in expected benefits. But, all other things being equal, members are expected to get higher pensions with less risk than they would from an individual DC scheme.
A CDC scheme calculates a target level of pension for the member, which is not guaranteed, based on the value of the scheme’s assets. In retirement, the member receives a pension directly from the scheme. Members are not faced with the choice between buying an annuity or keeping their pot invested and taking income drawdown (although members will be able to take a transfer out of a CDC scheme if they want to do that).
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