The Department for Work and Pensions (DWP) has given the green light to expand collective defined contribution (CDC) schemes, which it claims could boost retirement incomes by up to 60%.
It believes that new regulations, which will be set out tomorrow (23 October), will benefit millions with employers permitted to pool multiple pension schemes into a collective fund.
“By expanding CDC to more employers and consulting on retirement CDC, we are helping build a fairer pensions system that gives people confidence their hard-earned savings will last, and they can enjoy their retirement,” said pensions minister Torsten Bell.
Bell is expected to deliver a speech this afternoon on the benefits of CDC schemes, with the government set to launch a consultation on the plans.
Lynne Rawcliffe, pensions trustee director at Law Debenture, believes these changes are a sign of “real progress as savers are truly placed at the heart of a member-first approach and could see material benefits in comparison to typical defined contribution schemes.”
This is “good news” for employers since they can use CDCs without being exposed to the financial risk associated with traditional defined benefit pensions and maintain a fixed contribution structure akin to a DC arrangement.
This announcement builds on the UK’s first CDC scheme, which launched in October 2024.
New report highlights strong appetite for CDC
The Royal Mail Collective Pension Plan, which has over 100,000 members, was considered a landmark moment for the UK pension landscape.
David Brooks, head of policy at Broadstone, said that while CDC may not be perfect, it could certainly prove to be good enough.
He added: “On one hand it satisfies the desire for a return to some degree of paternalism in pensions where people can, in return for their share of the cost, receive an income for life albeit without the gold plating of traditional defined benefit pensions.
“However, on the other there are question marks over whether it can provide better outcomes than individual defined contribution pensions or whether it can resolve accusations of inter-generational fairness.
“While this idea may be too late for many employers, it’s hoped that enough will see this as a way, without open ended costs, of providing a more secure income for employees in their retirement.”
Mark Futcher, partner and head of DC pensions at Barnett Waddingham, said that “while this momentum is encouraging good reform should be about cultivation, not upheaval.”
“CDC offers potential, but much of what it seeks to fix can already be addressed within the existing DC system if providers are simply given the room to innovate,” he added.
“Any development that supports stronger retirement futures should be welcomed, but the challenge will be achieving progress without adding unnecessary complexity.”
Lynne agreed: “While this is positive news, it is going to require a collaborative approach across the pensions landscape.
“It’s vital that trustees are involved early in the process and play a key role in shaping member expectations and providing crystal-clear communication on CDC benefits.”
