A new type of pension pot

A new type of pension scheme promising reliable returns – and potentially boosting retirement incomes for thousands of Shropshire workers – is on its way.

Collective Defined Contribution is a new type of employee retirement provision under which employers pay a fixed rate of contributions into the scheme and members are paid pensions with variable increases.

It is described as a hybrid alternative to defined benefit and defined contribution schemes, and is already popular in other countries such as Canada and the Netherlands.

The CDC pension has been discussed for several years as a way of plugging the gap between the increasingly rare but more generous Defined Benefit schemes – also referred to as ‘final salary’ pensions – and the more recent Defined Contribution schemes.

Benefits of the new scheme, the Government says, include the fact that it offers predictable costs for the employer, and is more resilient against economic shocks, such as those caused by the pandemic.

Minister for pensions, Guy Opperman, said: “We have seen the positive effect of these schemes in other countries – and it is abundantly clear that when they are well-designed and well-run they have the potential to provide a positive outcome for savers, 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.

“Currently all pensions are either Defined Benefit, linked to salary or length of service, or Defined Contribution where pensions are based on how much you pay in.”

Regulations laid before Parliament will provide the foundation for CDC schemes to be introduced in Great Britain soon.

The move also paves the way for the launch of the CDC scheme that Royal Mail and the Communication Workers Union was already aiming to introduce.

According to new research from the Association of Consulting Actuaries, more than a fifth of businesses are interested in setting up a CDC scheme for their employees.

Patrick Bloomfield, who chairs the ACA, said: “The level of business interest in CDC as a new form of pension saving is very exciting. These findings back up the experience of ACA members, who are working with many businesses looking into offering their employees a CDC scheme.”