Chancellor Philip Hammond will today launch a long-awaited consultation on introducing collective defined contribution (CDC) pensions in the UK, reports from this morning have suggested.
The consultation is likely to begin the process of establishing the legal and regulatory framework to allow employers to build collective schemes, with some organisations, such as Royal Mail, already committing to offer CDC to its members once the rules are in effect.
Commenting, AJ Bell senior analyst Tom Selby said: “The government is clearly chasing some positive pensions headlines by launching its CDC consultation alongside the Budget. In establishing the framework for such schemes to exist in the UK it is important both the benefits and potential risks are fully explained to members.”
Selby explained that CDC works in a similar way to the “old-fashioned with-profits policies” that were popular during the 1980s and 90s where, rather than each member having an individual pot, all assets are pooled together and invested collectively. The aim of the collective fund is to provide all members with a certain level of pension each year, without actually promising or guaranteeing it.
“Advocates of the schemes argue that by pooling investments, members can share risk between them and, they argue, potentially benefit from higher returns. However, the government itself has previously noted some of the more extravagant claims of CDC backers – including that returns could be 50% higher than individual DC – should be treated with extreme caution,” Selby added.
The AJ Bell analyst highlighted that the primary benefits of CDC, such as the ability to hold risk seeking assets over the long-term while paying low charges, are already available to individual DC members. Selby noted that individual DC members would also lose the benefit of flexibility over how they spend and invest their pot if they were to enrol in a CDC scheme, unless exit penalties were imposed.
However, he acknowledged that it would make “absolute sense” to build a CDC framework to support employers and savers, if the government believes there is a strong demand for the scheme.
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