Brits who are saving into a company pension will benefit from wide reaching reforms that mean they are more likely to get a guaranteed income when they retire, Torsten Bell, minister for pensions has confirmed. Currently many Brits are saving into a defined contribution pension, a type of pension which does not guarantee the exact amount they will retire on, instead it is based on a combination of how afford to pay in during their lifetime and how well the pension company’s investment performs.
Most pensions used to operate on a final salary, or defined benefit basis. These types of pensions guaranteed that a saver will get a pension worth an exact percentage of their final salary, although it will depend on how long someone has worked for that company.
The expense associated with final salary schemes means that, since the 1990, many have now closed to new members. They still exist but are only run by large institutions, such as local government or large companies, that can afford to adminster and run them.
Torsten Bell, said he was committed to bringing back a version of final salary schemes for younger workers.
These schemes, known as collective defined contribution (CDC) schemes, allow pension funds to club together and pool both their investment and longevity risks.
The Department for Work and Pensions said more people than ever are saving into a workplace pension – £28 billion more in 2020 than in 2012 – with most of these pension pots being Defined Contribution (DC) schemes, where the employee is automatically enrolled to save a proportion of their salary tax-free and the employer contributes at least 3% of their salary to the pot too.
Collective Defined Contribution (CDCs) are a new type of pension scheme that sees both the employer and employee contribute to a collective fund.
The pooling of risk for members means they can aim to provide a target pension income for life – similar to defined benefit (DB) schemes, sometimes called an average or final salary pension, but without the risk of significant unexpected bills for employers.
In the UK, Royal Mail have already launched a CDC scheme for their employees which has over 100,000 members who are offered a combination of a cash lump sum and an income for life in retirement.
Speaking at the LCP Conference in London today, Bell said: “Success in the world of pensions isn’t just about getting people saving, it’s ensuring their savings work as hard as possible for them.
“Making sure more employers and savers have the option of an innovative Collective Defined Contribution Pension scheme is an important part of making that happen.
“Too often at present we are leaving individuals to face significant risks, about how their individual investments perform and how long their retirements last. Pooling some of those risks will drive higher incomes for pensioners and greater investments in productive assets across the economy.”
The minister also confirmed his desire to deliver decumulation only CDC schemes. These schemes would allow certain savers with DC schemes to access CDCs, offering retirees the chance to buy longer term, pooled retirement products that deliver stability for pensioners.
Modelling from the PPI suggests that single employer CDCs could deliver a significantly greater average replacement rate (47%) than currently delivered through annuities (40%) with even higher benefits seen for multi-employer CDCs as longevity risks are pooled. (69%).
And due to their size, CDCs can also be a more efficient vehicle for economic growth, with similar collective funds in Canada and Australia having proved an efficient way of supporting economic growth, investing in a wider range of sectors and assets.
CDC schemes can invest in illiquid and more productive investments over the long term, including in UK businesses and infrastructure projects, supporting the Government’s growth mission while providing employers with greater freedoms as well as reducing the risks of over or under spending in retirement by paying pensioners based on life expectancy.
