Applications for CDC schemes open

Applications for collective defined contribution (CDC) pension schemes officially opened today (1 August), in what has been highlighted as an “injection of innovation” for the industry, with plans to consult on new forms of CDC pensions confirmed for later this year.

In CDC pensions, both employers and employees contribute to a collective fund from which individual retirement incomes are drawn, with trustees responsible for ensuring schemes are viable and can meet their legal requirements and commitments.

It will offer an alternative to the two current primary scheme models, defined contribution (DC) and defined benefit (DB), and is expected to provide both improved returns for savers, with a more predicable cost for employers.

Legislation for single or connected employer CDC schemes was introduced as part of the Pension Schemes Act 2021, with The Pensions Regulator also laying its code of practice for CDC schemes before parliament earlier this year.

However, according to the Department for Work and Pensions (DWP), some parties have already expressed an interest in expanding CDC models, including multi-employer CDC schemes and the potential for CDC schemes that offer “decumulation only”.

In light of this, the DWP has confirmed plans to consult a package of prospective design principles and approaches to accommodate new types of CDC schemes “later this year".

Commenting on the introduction of the new scheme type, Pensions Minister, Guy Opperman, stated: “CDC schemes have the potential to transform the UK pensions landscape.

“We have seen the positive effect of these schemes in other countries and it is abundantly clear that, when well designed and well run, they have the potential to provide a better retirement outcome for members, and can be resilient to market shocks.

“I have no doubt that millions of pension savers will benefit from CDCs in the years to come.”

The Pensions and Lifetime Savings Association (PLSA) also welcomed the potential innovation, with director of policy and advocacy, Nigel Peaple, suggesting that CDC "blends some of the desirable elements of DB, such as clearer target outcomes for the saver, and of DC schemes, such as predictable contributions".

"By pooling longevity risk and the ability to invest money over a longer period, CDC has the potential to provide new and better approaches for benefit provision," he continued.

“There are, of course, challenges, including how to ensure savers understand the variability of benefits, and ensuring new models can deliver in practice once reserving and regulation is in place.

"Nevertheless, we are confident that this ambitious proposal will provide the incentive and momentum to overcome them.”

Adding to this, Aon partner and head of CDC, Chintan Gandhi, highlighted the introduction of CDC schemes as "biggest innovation for UK pensions in a generation", agreeing however, that this is "just the start", with much more to come in the next few years.

He stated: "Beyond the single-employer designs permitted by today’s new regulations, there are the perhaps even more significant innovations that are likely to emerge and to have a real impact on employers and pension savers.

"These include introducing multi-employer, industry-wide and commercial master trust CDC solutions that will allow employers of all sizes and pension contribution budgets to pool risk together and provide CDC pensions.

"This would expand the accessibility of CDC schemes to millions more people and offer them access to an income for life in retirement, without having to buy an annuity, as they seek to make better financial decisions.

“When commercial master trusts are able to offer decumulation-only CDC solutions, there is the prospect of anyone – in whatever way they have built their pensions pot – having the option to buy a CDC pension at retirement with some or all of those savings. This would be a huge change in the UK pensions landscape.

“However, further expansion of the CDC regulations introduced today will be needed to unlock these possibilities. The government has committed to consulting by the end of this year on the principles on which they intend to regulate, followed by the final regulations.

“The next key date is likely to be in 2024, when CDC is fully opened up for non-connected employers and commercial master trusts. But today is when all this starts."

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