New ‘halfway house’ pension scheme given the go-ahead in bid to reduce risk for savers

Pensions secretary Amber Rudd has given the green light for a new, Dutch-style pensions scheme to enter the market, which bids to give savers more stability by pooling risk.

The so-called Collective Defined Contribution (CDC) scheme, which is widespread in Denmark and the Netherlands, will be offered to Royal Mail workers first, before a planned roll-out to other companies and sectors.

CDC schemes seek to offer less risk than defined contribution schemes, while putting less of a burden on employers than gold-plated defined benefit schemes.

The CDC scheme would be seen as a halfway house between the two, as members share risk by putting their money into one fund instead of individual pots.

Rudd said: “These pioneering proposals should deliver improved investment returns for workers and savers while cutting costs and red tape for British job creators.

“Any steps that result in better saving returns for workers are something to celebrate and I look forward to working with industry to enhance the prospects of millions of workers.”

Unlike with final salary pension schemes, payouts are not affected if the employer goes under, while group contributions are pooled together and invested in a bid to give members a higher payout.

The new schemes are expected to appeal to companies who want to offer strong pensions provisions to employees without having to hang on to enormous pension liabilities.

But Steve Webb, former pensions minister and director of policy at Royal London, said although the news was a positive step, “the proposed legislation will be very narrow in scope”.

It could be years before the broader workforce has the chance to benefit from such a scheme, he added, as “even for the Royal Mail it is likely to be several years before a scheme could be up and running”.

“If other employers want to use a different model, this could need new primary legislation and we would probably be talking about the mid 2020s before further schemes could be in place.”

Tom Selby, analyst at AJ Bell, added: “CDC schemes have the potential to be a positive new addition to the UK pensions landscape. But anyone expecting an immediate retirement revolution or a massive ‘pensions boost’ resulting from the design of such schemes probably needs to reassess their expectations.”