A UK parliamentary committee has extended its deadline until Jan. 31 for evidence in an inquiry concerning a controversial new form of pension called collective defined contribution pensions.
Collective Defined Contribution (CDC) pension plans are a type of retirement saving plan that is common in the Netherlands, Canada, and Denmark, but have only recently been allowed in the UK. They were authorized by primary legislation in 2015, but regulations to make it possible have not yet been enacted. Also known as a form of “defined ambition” plan, CDCs differ from defined benefit plans in that the employee is not promised a certain retirement income, but instead has a target amount the plan will pay out based on a long-term, mixed-risk investment plan.
CDCs aim to pay out an adequate level of index-linked pension for life, but do not offer a contractual guarantee. They have the scope to redefine the benefits they offer under circumstances such as adverse economic conditions. CDCs differ from defined contribution plans in that they do not produce an individual pension pot, which a worker then has to decide how best to use for retirement, but instead invest their savings in a larger “collective” pot, and then provide an income during retirement.
The Work and Pensions Select Committee has called for evidence from any interested parties concerning the following CDC-related questions:
- Would CDC deliver tangible benefits to savers compared with other models?
- How would a continental-style collective approach work alongside individual freedom and choice?
- Does this risk creating extra complexity and confusion? Would savers understand and trust the income ‘ambition’ offered by CDC?
- Could seriously underfunded DB pension plans be resolved by changing their pension contract to CDC, along Dutch lines?
- How would this be regulated and how would the loss of DB pension promises to scheme members be addressed?
- How would CDCs be regulated?
- Is there appetite among employers and the UK pension industry to deliver CDC?
- Would CDC funds have a clearer view towards investing for the long term?
“What the Select Committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could club together and pool the risk themselves,” said Frank Field, committee chair, in a statement.
Tags: Canada, CDC, collective defined contribution pensions, Denmark, Netherlands, UK parliament