The government should set a “swift timetable” to allow companies to create collective defined contribution (CDC) schemes, as the opportunity presents a “new Beveridge” for pensions, the Work and Pensions Committee has said.

In its report on CDC schemes published today, 16 July 2018, the Committee called the agreement between Royal Mail and the Communication Workers Union to create a CDC scheme as “ground breaking”.

It stated how CDC schemes can act as “middle ground” in a pension system that is split; defined benefit schemes in decline due to the burden they place on employers, whilst defined contribution schemes, although popular, “require individuals to shoulder the burden of investment risk, volatility, uncertain life expectancy, and purchasing a suitable pension income product on retirement”.

The Committee highlighted Denmark and the Netherlands, where CDC schemes are already prominent features of their pension systems and offer a regular retirement income but in the form of a target benefit rather than DB schemes’ “guarantee”. It explained how changes in the funding position of the scheme are addressed by adjusting the benefit rather than calling on extra contributions from the employer.

“CDC may well appeal to companies who want to offer good pensions to their staff without the risk of large long-term pension liabilities on their balance sheets. The prospect of a regular and relatively reliable income in retirement may be welcomed by those staff. Through the pooling of risk between scheme members, CDC may well also provide more generous pensions on average than standard DC saving. CDC would therefore be a good choice for some employers and some savers,” the report said.

The Committee believes that introducing CDC schemes to the UK would be consistent with pension freedoms and promoting retirement savings. “Some critics suggest that the collective approach of CDC runs counter to the spirit of pension freedoms, however, it can also be regarded as adding a further attractive pension choice to the mix, potentially providing a further boost to pension saving,” it said.

Committee chair Frank Field has compared the report to the Beveridge Report, by William Beveridge which is noted for its influence on the creation of the welfare state.

“The idea of a ‘new Beveridge’ has been overused and under-delivered during most of the welfare state’s life. But the report published today by the Select Committee offers that opportunity for pensions: how to combine decades of individual pension ownership and provision with collective security. The report centres on collective defined contribution schemes specifically in relation to the breakthrough at Royal Mail,” he said.

The Committee said it welcomes the government’s intention to legislate to allow other companies to create CDC schemes, and suggested it does so using its existing powers under the Pensions Act 2011.

“This method would have the added benefit of assuring employers that they will not face subsequent additional deficit funding obligations. We further recommend the government consult on the technical regulations necessary to create a CDC system to a swift timetable set out in response to this report. CDC schemes should be governed by a board of trustees and both authorised and supervised by a proactive Pensions Regulator. They should be required to publish their benefit calculation rules and funding position and strategy at least annually.”

In addition, the report suggested the government consult on benefit adjustment and risk sharing policies, including how to achieve intergenerational fairness within CDC schemes; the regime for transfers out of CDC, including whether they should be permitted once pensions are in payment and whether members transferring out should have to take financial advice; and whether CDC scheme trustees should be required to have a specific qualification.

“A new system of CDC schemes opens the possibility of more diverse and ambitious provision of collective pensions, across industries and professions and to self-employed and gig economy workers. The regulations governing CDC should accommodate mutual, multi-employer and standalone schemes,” it said.

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