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Collective Defined Contribution (CDC) Schemes

Published Monday, January 13, 2020

Looks at legislation in the Pension Schemes Bill to provide a framework for Collective Defined Contribution (CDC) pension schemes

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The existing UK workplace pensions framework enables employers to offer either Defined Benefit (DB) or Defined Contribution (DC) schemes. There are downsides to both of these types of scheme: DC schemes may give a less predictable retirement income for scheme members and DB schemes can create significant risks to the employer.

The Government believes that there is a case for creating a third type of scheme: Collective Defined Contribution (CDC) pension schemes (referred to in the Bill as ‘Collective Money Purchase’ schemes). In CDC schemes, both the employer and employee would contribute to a collective fund from which retirement incomes are drawn. The funding risk would be borne collectively by the individuals whose investments make up the fund. Similar to a DC scheme, the employer carries no ongoing risk.

CDC schemes would offer a target income at retirement rather than a specified income like a DB scheme. If the scheme is under (or over) funded then the level of member benefits can be adjusted to ensure the assets of the collective fund are equal to the liabilities relating to the target incomes.

There is support for the introduction of CDC schemes. In November 2018 an agreement was reached between Royal Mail and the Communication Workers’ Union to work towards the establishment of a CDC scheme. A report by the Work and Pensions Select Committee urged the Government to enable this to happen. In March 2019, the Government said its priority would be to legislate to enable Royal Mail to establish a scheme, but to do so in a way that could quickly accommodate other models of CDC if appropriate in the future.

Part 1 and 2 of the Pension Schemes Bill [HL] 2019/20 , which had its first reading in the House of Lords on 7 January 2020, seeks to create a framework for the safe establishment, operation and regulation of CDC schemes in the UK. The schemes are proposed to be authorised by the Pensions Regulator. Briefing on the other parts of the Bill is available on our website. The progress of the Bill can be followed here.

Commons Briefing papers CBP-8674

Authors: Djuna Thurley; James Mirza Davies

Topic: Pensions

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