By Lyndsey Hall
With auto-enrolment at the forefront of everyone’s minds, you might be looking into the options available to you for your pension. In the past, the trend was for “defined benefit”, or final salary, schemes, which allowed you to pay in monthly and know exactly what you would get when you retired – a percentage of your final salary. However, these types of schemes have become incredibly rare and difficult to find in recent years, so more and more people are paying into “defined contribution” (DC) schemes instead. This means that you know exactly how much you are paying in each month, but you can’t be sure how much you will get out on retirement.
Now, according to an article on the BBC News site, the government wants to introduce “collective defined contribution” pension schemes, which allow tens of thousands of workers to club together and join a pension scheme that promises more certainty over how much you will receive on retirement, and could increase your investment value by around a third.
How does it work?
Let’s look at the facts:
- From an employer’s point of view: there is no risk, they pay the same amount in every month
- From an employee’s point of view: they choose their own target for what they want to receive on retirement
- It allows tens of thousands of workers to join a single pension plan
- The “collective” involves workers from the same industry, rather than company; e.g. hairdressers, or cleaners
Does it really offer better returns?
Due to the large scale, costs are lowered as the scheme doesn’t have to account for each employee’s individual pot. The scheme also allows investment in long term assets, like mortgages and transport projects. However, the returns are not guaranteed; in fact, in the Netherlands, where these types of schemes originated, back in 2012, a quarter of schemes cut pensions by an average of 1.9% to restore the schemes’ finances.
Whilst research shows that workers on a CDC scheme between 1955 and 2011 received on average 25% more than those on a DC scheme, it also reveals that, for those on schemes between 1994 and 2004, the opposite was true.
Workers are not guaranteed to receive the target amount of their salary on retirement, and DC pension charges are due to be capped at 0.75% from April 2015, but it not clear whether CDC schemes will have the same restrictions imposed. Pensioners on DC schemes will also get new freedoms to use their pension pots however they like, from April 2015, but CDC members may not get the same benefit.
Could CDC schemes come to the UK?
Collective defined contribution schemes require a great deal of cooperation between the different employers involved, and as a result of the government’s auto-enrolment drive, most businesses have already registered for a pension scheme. However, the Trade Union Congress (TUC) is supportive of the schemes, and several Dutch pension funds would be happy to launch schemes in the UK, so it remains a possibility for CDC schemes to be introduced to the UK.
Would you register for a CDC scheme? Would you enrol your staff on such a scheme as their workplace pension? Let us know your thoughts in the Comments.
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