Measures to enable the introduction of collective defined contribution (CDC) schemes in the UK by April 2016 are expected to be announced in the Queen’s speech on Wednesday.
According to reports, the Queen will announce the possibility of the collective schemes, which are common in the Dutch pensions market, in the speech which will set out the legislative agenda for the next Parliamentary session.
CDC schemes fix contributions, like traditional defined contribution or money purchase plans, but pay benefits out of pooled assets accumulated over time, which allows investment risk to be spread over generations in a way that traditional individualised DC does not.
This follows the Budget announcement in March which proposed a relaxation of rules for people retiring from DC schemes from April next year, including ending compulsory annuitisation.
It also comes in light of a government consultation in November 2013 on defined ambition (DA) which proposed greater risk-sharing and greater certainty for members than is provided by a pure DC and less cost volatility for employers than current DB pensions.
Barnett Waddingham partner Danny Wilding welcomed the announcement. “I would certainly welcome any plans which would allow collective defined contributions (CDC) to become a reality in the UK,” he said. “If the Budget’s proposed relaxation of rules for people retiring from defined contribution schemes goes ahead next year, there will be a real need to introduce new types of scheme which can take full advantage of the new rules.”
However, Punter Southall Transaction Services managing director Richard Jones, said: “I expect these CDC schemes to be very niche products particularly in light of the new flexibilities for traditional defined contribution schemes announced in the recent budget. We do not expect that many CDC schemes will be established.”
Hymans Robertson partner Lee Hollingworth said: “Anything that provides cross-subsidy from one group to another is always likely to result in winners and losers. With CDC, there is the risk that sustained periods of low returns could lead to the young subsidising current retirees. Likewise, those less well-off could subsidise those better off, as they will draw on their benefits for much longer given the difference in life expectancy.”
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