Collective pension schemes fill 'gap' between final salary & DC plans – DWP propose change

Pension: Bernard Jenkin says 8% increase ‘can’t be justified’

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Pension schemes are usually set up and contributed to by employers and workers alike under automatic enrolment rules, but most modern offices likely enrol staff in a defined contribution plans. Additionally, older workers and those nearing retirement may hold final salary pensions which can be very generous but expensive.

While both kinds have pros and cons, the DWP recently confirmed a new type of pension scheme is being worked on, with the aim of providing better retirement outcomes and stability to the market.

New Collective Defined Contribution (CDC) scheme, the DWP argued, will offer savers an income in retirement and also ensure that costs are predictable for employers.

They work by both employers and employees contributing to a collective fund, and from this fund individual retirement incomes are drawn.

The Royal Mail has been among the first employers to embrace the new scheme, as over 100,000 “posties” have been signed up and the scheme is strongly backed by the posties union the Communication Workers Union (CWU).

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New pension schemes may be on the horizon (Image: GETTY)

Guy Opperman, the Minister for Pensions, commented on the new scheme: “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 better retirement outcome for members, and can be resilient to market shocks such as the pandemic.”

The Government launched a consultation on CDCs on July 19, as it detailed: “This consultation seeks your views on draft regulations that set out what Collective Defined Contribution (CDC) schemes must do to become authorised, to operate effectively in the market under regulatory oversight, and what happens if changes need to be made to their schemes.

“The authorisation regime is designed to protect members and to build confidence in this new form of money purchase occupational pension provision by ensuring only soundly designed and well run schemes are able to operate.

“We ask specific questions about some elements of the draft regulations and would also welcome broader views on whether the regulations effectively deliver our intended outcomes.”


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thoughts on the scheme.

Mr Webb detailed:

  • Collective pension schemes aim to fill the gap between the old style ‘final salary’ or ‘defined benefit’ pensions where all of the risks were borne by the employer, and new ‘pot of money’ or ‘defined contribution’ pensions where all of the risk is on the individual; under DB schemes, the member doesn’t have to worry about things like inflation, stock market movements or how long they will live, as the employer covers all these costs; but in the new world you just end up with a pot of money at retirement which you have to manage; you don’t know how long for, and you need to think about the ups and downs of the stock market and how inflation will eat away at the value of your pot
  • Collective schemes are better for employers because there is no hard guarantee which they have to fund; but they can be better for members because they give you a ‘target’ level of pension for each year you work; they can also be better because: If they are invested for growth over a long period, they may generate bigger pensions; they are often guaranteed to pay a pension as long as you live, so you don’t have to manage that uncertainty
  • Other countries have had well-regarded collective schemes, although every country does them in a different way. The downsides are that they can be complicated, and if you don’t get them right you can sometimes end up favouring one generation over another

State pension

Many retirees are dependant on state pensions (Image: EXPRESS)

Mr Webb continued: “The regulations out for consultation today will give one employer – the Royal Mail – what it needs to press ahead.

“But as the Minister says in the foreword, there’s quite a lot of interest in other variations – e.g. collective schemes that could straddle multiple unrelated employers, or collective schemes for retirement only, and we are some way away from having the rules around those.

“We’d like to see progress on this, not least as I implemented the first legislation to pave the way for collective pensions back in 2015!

“Collective pensions could offer a positive ‘middle way’ between old-style final salary pensions where the employer took on all the risk, and more modern ‘pot of money’ pensions which have to be managed by the individual.

“If employers are willing to operate such schemes they have the potential to generate better pension outcomes for employees, and the Government needs to press on with making them more widely available.

“It is hard to believe that it is only the Royal Mail whose workers could benefit from a new type of pension”.

Changes of this nature may be needed now more than ever as many people appear to be ill-prepared for retirement.

Recent research from Penfold found almost three-fifths of people do not have a clue as to how much is in their pension pot and it also found 38 percent of those asked had no idea how much money they needed to retire on.

Harry Byrne

Harry Byrne

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