The Work and Pensions Committee has launched an inquiry into the merits of collective defined contribution (CDC) pension schemes, and the potential role they could play in saving for retirement.
The committee has indicated it would like to see evidence on how the introduction of CDC schemes would bring benefits to savers and the wider economy.
A CDC pension is a form of ‘defined ambition’ scheme. It works by having a target or ‘ambition’ amount it will pay out, based on a long-term, mixed-risk investment plan.
The scheme differs from a defined benefit (DB) scheme in that it aims to pay out an adequate level of index-linked pension for life – though this is not a contractual guarantee.
It meanwhile differs from a defined contribution (DC) scheme in that it does not produce an individual pension pot, but instead invests savings into a large “collective” pot that aims to provide the income during retirement.
The Select Committee is also seeking opinions and information on, for example, converting DB schemes into CDC schemes and whether underfunded DB schemes could be resolved by changing the pension contract to a CDC one.
Advocates of CDC schemes say they provide greater assurance of retirement income as well as more efficient pooling of costs and risks among members than a traditional DC scheme.
Those more sceptical of the scheme, however, argue they may further fragment the pensions landscape, suffer from lack of demand and run counter to the trend towards greater individual freedom and choice in pensions.
The Pensions Schemes Act 2015 created by the coalition government defined CDC as a distinct pension category but, in October 2015, the Conservative government announced the plans would be shelved indefinitely.
‘Be wary of the hype’
MP for Birkenhead and Committee chair Frank Field (pictured) said: “What the Select Committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could club together and pool the risk themselves.”
However, Hargreaves Lansdown head of policy Tom McPhail cautioned: “Be wary of the hype – these schemes are essentially the same as the with-profits funds that have let down so many investors over the past 20 years.
“There are a number of ways the UK’s pension system could be improved, such as increasing the amount people invest, making the tax rules simpler and fairer, and encouraging higher levels of engagement and personal ownership – and it is not apparent CDC schemes would resolve any of these issues.”
He added: “It is also fair to say that whatever their merits, these schemes do not sit easily in the current structure of the UK’s pension system.”
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