Exclusive: A new third way for pension savers

The UK has a world-class occupational pensions system. Today we are making it even better, introducing a third way to save for people across the country.

Collective defined contribution pension schemes – or CDCs – will shake-up the UK’s pension market, drawing on the strengths of defined contribution (DC) and defined benefit (DB) schemes, to bring a new injection of innovation into the sector.

We’ve seen CDC schemes work overseas in countries such as the Netherlands and Canada, and I’ve been making the case for some time that well designed and well-run CDC schemes have the potential to provide a positive retirement outcome for savers here at home.

This new scheme offers an alternative to the status quo by combining a reliable income in retirement for members with predictable costs for the employer, as well as building in more resilience against economic shocks. Their collective nature means that investment and longevity risks are shared across the whole membership.

The success of automatic enrolment means we’ve now got more people in the UK than ever before saving for retirement. Since its introduction in 2012, more than 10.6 million workers have been enrolled into a workplace pension, with an additional £28bn saved in 2020 compared to 2012.

The effects have been transformative. In 2012, 40 per cent of eligible women in the private sector were participating in a workplace pension. By 2021, this had increased to 87 per cent.

For those earning between £20,000 and £30,000, participation has gone from 45 per cent of eligible employees in 2012 to 88 per cent in 2021.

With a record number of people saving, a record number will also need to consider how to convert their pension savings into retirement income.

CDCs can help here too. Since they provide an income for pensioner members, they eliminate the potential risk associated with having complex financial decisions at the point of retirement.

Regulations currently provide for single or connected employer CDC schemes, but we’re already looking at how we build on this and expand CDC options further.

For example, we’re already seeing industry and stakeholders express interest in extending CDC to multi-employer schemes and in 'decumulation only' CDC models (when pension savings are converted to retirement income).

To capitalise on the enthusiasm shown for innovation in this area – and with a view to bringing the potential benefits to more savers across the UK – we plan to consult later this year on a package of prospective design principles and approaches to accommodate new types of CDC schemes.

Today is just the start of an exciting future for CDCs – a new and welcome addition to our occupational pension landscape. I have no doubt that millions of Brits will benefit from them in the years to come.

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