Tue 05 Nov 2024 - The decline of defined benefit (DB) pension schemes shows no signs of slowing. Yet there is a growing school of thought that defined contribution (DC) schemes are not well suited to all groups of UK workers.
The freedom and choice agenda means DC members are no longer required to use their pension pot to provide for their retirement. However, it is impossible for individuals to know their own longevity and make appropriate investment decisions to meet their future income needs. That means drawdown leaves individuals open to the risk of running out of money in retirement. Insured annuity purchase is a relatively expensive way to purchase an income in retirement and is becoming less popular.
Collective defined contribution (CDC) schemes are designed to provide a viable fixed cost alternative to DC, which provide benefits in the form of an annual retirement income. The rate of increases on the CDC income is variable. The risk is collectively shared within the membership and higher benefit outcomes are expected as a result. CDC has the potential to improve benefit outcomes for millions of workers in the UK.
There has been much recent progress towards the introduction of CDC in the UK, and the Pension Schemes Bill 2019-20 set out a proposed legislative framework for the introduction of CDC schemes (to be referred to in legislation as ‘collective money purchase’ schemes).
Derek Benstead, CDC Working Party Deputy Chair
Simon Eagle, CDC Working Party Chair
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