Collective Defined Contribution Pension

POSTED BY:

Under current UK workplace pensions, employee’s pensions are either under a Defined Benefit or Defined Contribution scheme. The downside of the current schemes available is that Direct Contribution schemes may give less predicable retirement income for members whilst the Direct Benefit scheme can create significant risk to the employer. The introduction of the Collective Defined Contribution (CDC) pension scheme, as launched by The Pension Scheme Act 2021, allows for both the employer and employee to contribute to a collective fund from which retirement incomes are drawn. The funding risk will be borne collectively by the individuals whose investment make up the fund.

The new scheme would offer a target income at retirement rather than a specified income like Direct Benefit schemes. Under the scheme, the collective funds can be invested in high return seeking assets over a longer period of time that the traditional Defined Benefit schemes, benefiting the growth of the fund and its members.

Currently all pensions are either Defined Benefit, linked to salary or length of service, or Defined Contribution, which is dependent on how much you pay in. The introduction of the new scheme provides employers the advantages that pensions costs are fixed and the expected contribution rate is on average 40% higher than a typical Defined Benefit scheme. The scheme offers predictable costs for the employer and is more resilient against economic shocks.

The new scheme provides the benefit in the form of a pension, so:

  1. Market volatility is smoothed out, so member pensions are level and relatively stable;
  2. Members do not run the risk of running out of money e.g. from a drawdown pot; and
  3. CDC is simpler for members than Defined Contribution schemes, as you do not need to make investment or retirement provision decisions

Unlike the standard Defined Benefit scheme, the CDC does not guarantee the defined benefit as this is just a target and members can receive lower benefits if the funding does not support the target. From an employer’s perspective, they have no funding obligation other than for the defined contributions and any expenses the employer agrees to pay.

The Government has announced that later this year, the Department for Work and Pensions will aim to consult of a package of prospective design principles and approaches to accommodate new types of the CDC schemes, bringing more potential benefits to more savers in the UK in an appropriate manner.

Please do not hesitate to contact us on +44 (0)20 7480 5840 should you require legal assistance with any issues contained in this update. Alternatively you can contact us online

The content of this update is for the purpose of providing general legal information. It does not constitute legal advice from a solicitor and should not be treated as such.