Work and Pensions Secretary Amber Rudd has given the go-ahead for Dutch-style pension schemes to be offered to UK employees. These schemes, known as CDC, are a ‘halfway house’ between defined contribution and ‘gold-plated’ defined benefit schemes.
CDC stands for collective defined contribution schemes. They are similar to defined contribution pensions in that employer and employee make a regular contribution to a savings pot. Unlike defined contribution schemes, however, savers pool their money into a collective fund, rather than having their individual accounts. The idea behind this being that risks are shared evenly by all.
What’s more, CDC pensions give their members a ‘target’ income for life. Instead of a guaranteed income, CDC pensions say they’ll pay out a ‘target’ amount, based on a long-term mixed-risk investment strategy. This amount can change – it can fall in the event of circumstances like adverse economic conditions – or rise if the assets are particularly well invested.
Risk is shared by employers making changes to the amount they put in. When markets are down, pension payments can be reduced and contributions may be increased. Also, CDC funds can take a more balanced approach to investment risk rather than moving an individual pot into low-risk bonds as the retirement date approaches, as can happen with ordinary defined contribution pensions.
Critics argue that CDC pensions will be too hard to marry with the high level of control we have after the introduction of pensions freedoms in the UK. You wouldn’t be able to transfer out and buy an enhanced annuity if you had a low life-expectancy, as you would in a defined contribution scheme.
This scheme will be offered to Royal Mail workers first. They have strong support from the Communications Workers Union to go ahead with the scheme for its 140,000 members, though getting the scheme up and running might take a long time.