New occupational pension schemes get Government green light

It is envisaged that legislation will eventually follow in Northern Ireland
It is envisaged that legislation will eventually follow in Northern Ireland

A new type of occupational pension scheme which pools workers’ investments into one super-sized pot has been given the green light by the Government.

Pensions Minister Guy Opperman has announced that collective defined contribution (CDC) pensions will be brought forward.

The Government is now consulting on how such schemes, which are used in the Netherlands, could work in Britain.

The consultation applies to England, Wales and Scotland. It is envisaged that Northern Ireland will eventually make corresponding legislation.

Officials at the Department for Work and Pensions have been working with Royal Mail and the Communication Workers Union (CWU) to develop proposals for the introduction of CDCs.

The security provided by the large scale of such schemes could help to lead to more stable pension incomes.

As well as cutting administration costs, another potential benefit is that risks such as life expectancy and how long someone will need their pension for can potentially be pooled across a large group of thousands of pension savers.

The consultation will help to flesh out the details of exactly how such schemes could work and it is understood they will be brought in when parliamentary time allows following the consultation.

Currently, workers tend to have a defined benefit (DB) pension, which offers savers a guaranteed level of income when they retire such as a final salary pension - or, increasingly likely, a defined contribution (DC) pension, where the individual saver bears the risk of how much money they will eventually end up with in retirement and how well their investments perform.

DB pensions have become increasingly thin on the ground as people live for longer and firms find it difficult to meet their pension promises.

With the new type of CDC pension, payouts could be made to savers at a level agreed by trustees - potentially offering a middle ground option between DB and DC schemes.

The Government said the new schemes will be strictly regulated and required to undertake an annual, independent valuation to protect savers.

To protect the investments of members and ensure costs are controlled, all CDC pension schemes will be subject to a charge cap of 0.75% - set at the same level as DC pension schemes.