A group of influential MPs is backing a ‘ground-breaking new style of pension which they say could ‘transform the UK pensions landscape’.
They are asking the government to facilitate the creation of collective defined contribution (CDC) schemes, based on a model pioneered by Royal Mail.
Types of pension
At the moment there are two main types of pension – defined benefit and defined contribution.
A defined benefit scheme is also known as a final salary scheme which guarantees its members a retirement income based on their final salary. However, they are becoming less common as they are expensive to run for employers.
They are being replaced by defined contribution schemes where a member grows their pension by saving a defined amount a month from their salary into their pension fund and it is usual for the employer to match the amount saved.
All new auto-enrolment workplace pension schemes are of this type.
The Royal Mail CDC scheme was agreed with the Communication Workers Union in January of this and saw the closure of the firm’s final salary scheme.
The new scheme differs from its predecessor by not offering a guaranteed personal pension pot on retirement. Instead, there will be a target amount based on a long-term mixed risk investment plan. Savings are invested into a single large collective pot which then pays an income to individuals when they retire.
The Works & Pensions Select Committee have called on the government for ‘a swift timetable’ for the creation of CDCs, based on the Royal Mail model.
Committee chairman Frank Field said: “The report published today by the select committee offers the opportunity for pensions to combine decades of individual pension ownership and provision with collective security.”
The committee believes the new style pensions should be governed by a board of trustees appointed by The Pensions Regulator (TPR).
The schemes would be required their benefit calculation rules and funding position on an annual basis.
In its report, the committee hailed the Royal Mail agreement as ‘ground-breaking’ and said it could ‘transform the UK pensions landscape’.
They said that compulsory advice for transfers out of a CDC scheme should be considered as they would be as complex as their defined benefit equivalents where all transfers worth more than £30,000 have to be done on an advised basis.
However, the report warned there was still much work to be done to adapt the Royal Mail scheme into one which would have a broader-based appeal, saying: “Given the novelty of the CDC proposition, more work is needed to determine whether extra protection is warranted for members considering transfers out of CDC.”
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Not everyone is convinced the new savings method should be made more widely available. Pensions expert Nathan Long said the idea was ‘not a pension blueprint holding universal appeal’.
He added that the lack of a guaranteed payout could be confusing for savers and that there were ‘uncomfortable similarities’ to the with-profits schemes of the 80s and 90s ‘which often left policyholders disappointed’.