The UK’s Work and Pensions Secretary Amber Rudd said she supports allowing Collective Defined Contribution (CDC) pension plans in the UK, a decision that was welcomed by postal services provider Royal Mail and the Communication Workers Union (CWU).
“These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators,” said Rudd. “The new type of pension is currently used in Denmark and the Netherlands—two countries widely recognized as having among the best pension systems in the world.”
CDCs are a type of retirement saving plan that differs from defined benefit plans in that the employee is not promised a certain retirement income, but instead has a target amount the plan will pay out based on a long-term, mixed-risk investment plan.
CDCs seek to pay out an adequate level of index-linked pension for life, but unlike defined benefit plans they do not offer a contractual guarantee. And they differ from defined contribution plans in that they do not produce an individual pension pot, which a worker then has to decide how to invest, but instead invest savings in a larger “collective” pot, and then provides an income during retirement.
Although the plans are common in the Netherlands, Denmark, and Canada, they have only recently been allowed in the UK. They were authorized by legislation in 2015, but regulations to make it possible have not yet been enacted, and Parliament recently concluded its inquiry into the matter.
In a video message to CWU members, Terry Pullinger, the union’s deputy general secretary, called the approval by Rudd a major milestone.
“There is a period of time when the legislation has to be drafted and, given the current political climate, we can’t say exactly when that time is,” said Pullinger, “but we can say our new pensions scheme is coming.”
The UK’s Department for Work and Pensions said that millions of workers could eventually benefit from better retirement savings with CDCs.
“The benefits of CDCs are clear,” said the DWP in a release. “Members get more certainty in their retirement, with regular pay-outs from their scheme. And unlike traditional final salary pension schemes, those pay-outs aren’t affected if your employer goes under.”
The DWP also said protections will be built into the system to ensure fairness for both younger and older CDC pension members. Additionally, trustees of CDCs will be required to explain the potential for fluctuations in pay-outs—depending on investment performance—to members at the start.
However, the new type of pension is not without its critics. Last summer, a report from conservative think tank The Centre for Policy Studies said CDCs are risky and untested.
“The system risks creating irreversible intergenerational injustice by overpaying pensioners at the expense of current and future employees,” said the report. “The evidence all points to an obvious conclusion—CDC schemes in the UK are superfluous.”