New Laws Designed To Lower Costs For Employers

New rules which would see pension pots pooled to increase the chances of employees getting a greater retirement income have today been announced in the Queen’s speech.

The newly unveiled collective defined contribution (CDC) legislation is designed to spread the risk between members, offer greater stability, and limit costs to employers.

The new type of pension already exists in Holland and represents a mix between a defined benefit (DB) scheme, where people are offered a guaranteed retirement income, and a defined contribution (DC) scheme which involve individuals paying a certain amount each month, but do not know the eventual income that will be generated on retirement.

A new collective scheme would in essence provide a target for the employee to aim for, such as in a defined benefit scheme, whilst allowing employers to pay out the same amount each month – a benefit associated with DC schemes.

As announced in the budget, the Queen's speech also confirmed that people aged over 55 will be given new freedoms to cash in their pension as they see fit, subject to their marginal rate of income tax.

Expert Opinion

Whilst the collective defined contribution (CDC) announcement is eye-catching again, the devil will be in the detail. Will, for example, the 0.75% charge cap which will apply to defined contribution schemes for auto-enrolment purposes be applied to CDCs? Caution is also required when predicting the impact on the size of the eventual pension pot, returns are always subject to performance of the underlying investments and there is no guarantee for members they will receive their target pension. Investment volatility for members would undoubtedly be much reduced, but most of this will already be achieved by the pension reforms announced earlier this year at The Budget.

"Additionally, there is a big question mark over whether employers would want them. Many employers have just gone through the time consuming and costly process of putting in place auto-enrolment schemes. Whether these schemes become popular will certainly depend on the amount of regulation around their introduction."
Nigel Bolton - Partner