UK workers to be offered new risk-sharing pension

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In the UK, workers must be offered a new type of pension scheme that has the potential to provide better pension benefits and be cheaper for employers.

The government will unveil its plans for new risk-sharing group pension plans, which are currently not offered to workers in the UK, for a three-month consultation on Tuesday.

The Department of Work and Pensions said the new group defined contribution (CDC) schemes – which are established in other countries, including Canada and the Netherlands – will provide more stable income for millions of registrants. to their employer’s retirement plan but having no certainty about the size of their retirement fund will grow.

In “defined contribution” plans, workers save in individual retirement accounts and take responsibility for deciding how to invest their savings and make them last through retirement, even though they may not have. the skills to do it.

In contrast, CDC schemes allow workers to pool their savings in a shared pot, which offers protection against investment and longevity risk by turning savings into a pension.

“Defined contribution group pension plans are an important innovation that will provide more choice and flexibility to pension plan members and employers,” said Guy Opperman, Minister of Pensions.

“It is important that we are right, which is why we consult on the details of our proposals before presenting a bill.

The CDC consultation comes as private sector employers in the UK have all but given up on offering traditional ‘defined benefit’ (DB) pension schemes, where the worker is promised a lifetime pension, depending on his or her career. salary and seniority.

In contrast, members of CDC agreements are offered a “target” income, rather than a firm promise. Importantly, this income can rise and fall in retirement as the plan responds to investment volatility.

Employers will continue to make contributions to the pension plan on behalf of their employees, but will not be responsible for funding any shortfall, as they are in DB plans.

“For most employers these days, an absolute red line on pension design is that their costs are set in advance, with no impact on the bottom line or unpleasant surprises,” said Simon Eagle, business manager. retirement of Willis Towers Watson.

“CDC offers this, but combines it with potentially higher and more stable expected pensions for employees than typical individual arrangements in DC, especially when the jars are used to purchase annuities at retirement,” he said. added.

However, John Ralfe, an independent pension consultant, expressed concern that CDC plans are unfair to younger generations who may be called upon to support older members with higher contributions.

The government says the new plans will be tightly regulated and will have to undertake an independent annual review. Plans will also be subject to a 0.75% fee cap to protect members.

Royal Mail, which worked with the Communication Workers Union to deliver a CDC program to its 141,000 employees after its DB plan closed earlier this year, said it was “delighted that the government has launched a formal consultation”.

However, Sir Steve Webb, Royal London policy director and former Pensions minister, said the consultation schedule and potential future legislation meant it would take “many years before a single CDC scheme could be operational. “.