Collective defined contribution (CDC) pension schemes will be included in primary legislation in next year’s pensions bill, announced the Queen during the state opening of Parliament.
The Private Pensions Bill would:
- Make provisions for a new legislative framework in relation to the different categories of pension schemes. It would establish three mutually exclusive definitions for scheme type based on degrees of certainty in the benefits that schemes offer to members.
- Define schemes in terms of the type of ‘pensions promise’ they offer to the individual as they are paying in. A scheme would be categorised as a defined benefit scheme, a defined ambition (shared-risk pension scheme) scheme or a defined contribution scheme, corresponding to the different types of promise.
- Enabling ‘collective schemes’ that pool risk between members and potentially allow for greater stability around pension outcomes. It would also contain a number of measures relating to the valuation and reporting requirements for collective schemes.
Joanne Segars, chief executive of the National Association of Pension Funds, said:
“CDC schemes potentially offer employers increased flexibility and choice in how they can structure pension schemes to benefit members by providing pooled risk, smoothing, and greater certainty. This is to be welcomed.
“Defined benefit schemes have operated on a pooled-risk basis for many years and have shown considerable innovation in managing this effectively and at low cost.
“For defined contribution schemes, the focus must remain on providing good outcomes for members. CDC may well have a role to play in this, but the fundamentals still apply. Good outcomes for members are built on strong governance, low charges and investment strategies based on members’ needs.
“The real goal here has to be schemes operating at scale. Scale is a necessary precondition for CDC, but it also enables a much wider range of member benefits.
“As a result of automatic-enrolment we are already seeing the emergence of large pension schemes in the form of master trusts, which are able to offer their members high-quality investment strategies and great value for money.”