Collective Defined Contribution schemes, or CDC’s, are an alternative to the two current types of pension plans available in the UK (defined contribution and defined benefit). This new type of scheme has the potential to provide higher retirement incomes for savers as well as more predictable costs for employers.
I’m sure you are familiar with defined contribution schemes. DC pensions are the most common type of workplace pension, where each employee has their own pot that both they and their employer contribute to. This money then gets invested to help the pot grow before retirement. But stock markets are a fickle thing, so it can be hard to know the best way to invest your money.
CDC pensions work in a similar, but enhanced way, to defined contribution pensions. Rather than each employee having their own pension pot, both employers and employees contribute to a collective fund from which individual retirement incomes are drawn. The idea is that the larger sum of money that would then be invested should produce higher returns. This will not only mean higher retirement incomes for the scheme members. If the money is invested properly, the higher rate of return should, in theory, also outweigh major market drops.
“We have seen the positive effect of these schemes in other countries and it is abundantly clear that, when well designed and well run, they have the potential to provide a better retirement outcome for members, and it can be resilient to market shocks.”
Guy Opperman, Minister of Pensions1
It is said that even in the event of big, long-lasting falls in the stock market, anyone with a CDC pension would, in theory, still be better off than those with a DC pension.
CDC’s are a type of workplace pension. This means that you wouldn’t be able to set one up yourself like a private pension. Instead, your employer would need to choose this type of plan. As CDC’s grow in popularity, more and more employers are likely to opt for this type of pension, especially as it benefits them too by offering more predictable costs.
For now, Royal Mail are trialling the UK’s first CDC scheme, which will launch next year.
The DWP plans to consult later this year on prospective principles and approaches to accommodate new types of CDC schemes that will bring these benefits to more people in the UK.
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