New pension scheme to ‘inject innovation’ into the industry

A brand new vehicle to help Brits save for retirement launches today in what is being billed by ministers as “an injection of innovation” into the pension regime.

Collective defined contribution pensions (CDC) will provide an alternative to defined contribution (DC) and defined benefit (DB) pension schemes, Britain’s two main retirement saving programmes.

CDCs are similar to DCs and DBs insomuch that savers contribute to a pool of funds that is managed by a trustee who is responsible for ensuring the scheme can fulfil its obligations.

Both employers and employees contribute to the fund.

CDCs ”will shake-up the UK’s pension market, drawing on the strengths of DC and DB schemes, to bring a new injection of innovation into the sector,” Guy Opperman, pensions minister, told City A.M.

“The UK has a world-class occupational pensions system. Today we are making it even better, introducing a third way to save for people across the country,” he added.

Britain’s pension regime has undergone a huge shift since the coalition government in 2012 made most workers automatically contribute to a pension, known as auto-enrolment.

Under the measure, UK employers are legally required to create a workplace pension, put all their qualifying employees into it and contribute to their pension savings. Staff also set aside a proportion of their monthly paycheck.

The policy has boosted pension participation as most people decide not to opt out of the scheme despite having the option to do so.

Employers typically use the DC model when setting up their workplace pension scheme. 

The amount of money a saver has available for retirement under a DC plan depends on how much is put into the fund, the fund’s return on investments and the terms of the annuity. 

People can also now access their pension from the age of 55.

Employers tend to use DC schemes as they are cheaper than providing a DB package, which guarantees a specific amount of income for a retiree.

DB packages were commonly used by employers for decades but have become a rarity.