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27 Nov 2017

´Defined ambition´ pension schemes may be introduced in the UK

MPs are planning to look into “defined ambition” pension schemes, which are common in the Netherlands, Canada and Denmark but are not yet allowed in the UK.

Also known as Collective Defined Contribution (CDC) schemes, they are seen as a middle ground between Defined Benefit (DB) schemes such as final salary pensions, which promise savers a certain level of income when they retire, and Defined Contribution (DC) schemes.

The Work and Pensions Select Committee has launched an inquiry into the role that CDC schemes could play in the UK pension landscape, the potential benefits to savers and the wider economy, and the legislative and regulatory framework that would be required to make it work.

Unlike the traditional DC schemes that are largely replacing DB schemes, they do not produce an individual “pension pot”, which savers then have to decide how best to use for their retirement. Instead, the savings are invested in a larger “collective” pot, and provide a retirement income.

A CDC scheme has a target or “ambition” amount it will pay out, based on a long term, mixed risk investment plan. According to the Work and Pensions Committee, CDCs aim to pay out an adequate level of index-linked pension for life, but this is an ambition rather than a contractual guarantee. They have the scope to redefine the benefits they offer if circumstances — like adverse economic conditions — require.

CDC schemes take the big central decision of pension freedoms out of retirement planning, and also much of the risk, the Committee said.

Advocates of CDC schemes argue that they provide greater assurance of retirement income and more efficient pooling of costs and risks among members than traditional DC schemes, without employers having to take on the burden of underwriting a pension promise. Studies by the RSA and Aon Hewitt suggest that CDC could have delivered 33% better pension outcomes than traditional DC over the past 50 years.

Committee chair Frank Field MP said: “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.”

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