New ‘middle ground’ pension scheme backed by minister

A new type of “middle ground” pension scheme has been given the green light.

Work and Pensions Secretary Amber Rudd has backed plans for Dutch-style pension schemes that pool risks in the UK after the pensions industry, insurers and other bodies welcomed the move proposed by Royal Mail and the Communication Workers Union (CWU).

Collective defined contribution (CDC) schemes are a middle ground option between “gold-plated” final salary pensions, where savers are promised a certain level of payout when they retire but are expensive for companies to run, and defined contribution (DC) schemes, where individual savers bear the risk of how much money they will end up with when they retire, depending on how well their investments perform.

CDC pension schemes offer a regular retirement income by allowing group contributions to be pooled together and invested to give members of the scheme a higher final benefit level.

Amber Rudd
Amber Rudd (Stefan Rousseau/PA)

The Government said the new schemes are expected to appeal to companies who want to offer strong pensions provisions to employees without having to hang on to enormous liabilities.

Primary legislation will be brought forward to introduce CDCs as soon as parliamentary time allows.

Ms Rudd said: “The new type of pension is currently used in Denmark and the Netherlands – two countries widely recognised as having among the best pension systems in the world.

“Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industry to enhance the prospects of millions of workers.”

Jon Millidge, chief risk and governance officer at Royal Mail, said: “This is very welcome progress.
Royal Mail and CWU have been campaigning together to bring about this legislation, building a cross-party alliance of supporters in both Houses of Parliament as well as working with Government.

“We now look ahead to the next stage, and ultimately, delivering the UK’s first CDC pension.”

Terry Pullinger of the CWU said: “We are very proud and ready to be at the forefront of this historic moment.”

Pete Glancy of Scottish Widows said CDCs have “the potential to be the ‘Marmite’ of the pension world”.

He said that while the pooling of risks may be attractive to some employees, “to succeed, it may be necessary to allow people to select their own pension scheme, like in Australia”.

“Employees could select from a range of schemes including CDC and traditional DC. Employees who select a CDC arrangement could retain that arrangement as they move from job to job.”