Stay informed with free updates
Simply sign up to the Workplace pensions myFT Digest — delivered directly to your inbox.
New rules aimed at accelerating the creation of collective defined contribution pension schemes will help increase trust in UK retirement savings, the pensions minister has said, after a surge of interest in the products.
Torsten Bell told the Financial Times that regulations allowing multiple private sector employers to join collective DC schemes, to be published by the government on Thursday, could boost retirement incomes by 25-60 per cent.
While it was “too early to say” if CDC products would become the main option across the UK’s £600bn workplace DC market, “we should be confident that this will play a significant part in our future pension system”, Bell said.
Trust in the system was “not high enough” but this could be fixed by “delivering a system that people believe will actually give them a high enough income”, he added, noting “significantly higher” demand from providers and employers for the schemes than he had expected since taking office in January.
CDC schemes offer a halfway house between traditional defined benefit pensions plans, which offer predictable payouts but are now generally closed to new members in the private sector, and defined contribution plans, where payouts are based on investment performance as well as how much the individual and company has paid in.
Despite being allowed in the UK since 2021, only one CDC scheme has been set up — by Royal Mail last year, with 110,000 members.
CDC members participate in a pooled scheme and are offered a target return around which they can plan their retirements. But returns are not fixed and companies are not obliged to make up any shortfalls in the scheme’s funding.
The government hopes new schemes will boost retirement incomes and channel savings into a wider pool of assets, as members share risk.
Bell said: “What companies like about it, particularly those that employ people for a long time, is that they were sad they removed defined benefit pensions but the risks were too great . . . [CDC] offers a midway house that offers more but doesn’t bring all the risk back in-house.”
The Department for Work and Pensions has also put forward plans for such schemes to be made available for people specifically drawing down on their pension.
Ministers have previously warned of a “massive” problem of shrinking pension incomes as more people retire on DC schemes, and have set up a commission to examine options to boost pension savings.
They also hope that if companies club together to produce large, risk-sharing CDC schemes, more investment will be channelled towards UK infrastructure and start-ups, helping to support the government’s mission to boost the economy.
But take-up of CDC schemes has been slow. Companies have been reluctant to set them up because they have established defined contribution plans and are nervous of introducing new structures that could introduce new business risks.
“Private sector employers have felt the heavy burden of increasing DB costs over the last few decades . . . how willing are they to go back from DC towards DB and embrace CDC?” said a professional trustee.
Bell said that although there was “complexity at the upfront phase” of an employer introducing a CDC scheme, it “isn’t returning to the risk game for them — once they’ve paid their contributions, they are done”.
In May TPT Retirement Solutions became the first company to announce plans to launch a multi-employer CDC scheme.
TPT chief executive David Lane said that “hundreds” of employers were signalling interest in the scheme, mainly in sectors where there was union interest in employee benefits and where people typically moved employers within their industry, such as transport and retail.