Collective Defined Contribution (CDC) Schemes

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

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.

Parts 1 and 2 of the Pension Schemes Bill [HL] 2019/20 , which had its Second Reading in the House of Lords on 28 January 2020, seek to create a framework for the safe establishment, operation and regulation of CDC schemes in the UK. They were debated in Committee on 24 February. Issues included: 

• The impact on defined benefit pension provision;
• How to ensure scheme design is inter-generationally fair;
• The role of employers in ensuring schemes are financially sustainable;
• Whether TPR will be able to ensure trustees are ‘fit and proper’ persons on an ongoing basis;
• Whether there should a requirement to take advice on ‘transfers out’, as for DB schemes;
• Communications with scheme members;
• The scope and extent of regulation making powers. 

The Government amended the Bill to ensure it was able to apply a charge cap of 0.75%, as applies to the default fund of DC schemes used for auto-enrolment.

At Report Stage on 30 June 2020, the Lords voted to accept an opposition amendment that would require trustees to assess whether their CDC scheme operated fairly between different groups of members (HL Deb 30 June 2020 c598).