New definitions will be added to the current legislative framework for CDC schemes to provide a wider choice of pension schemes, encourage greater risk and enable savers to have more certainty about their retirement savings.
CDC schemes were first suggested in the government’s consultation paper, Reshaping workplace pensions for future generations, published in November 2013.
A scheme would be categorised as defined benefit (DB), defined ambition (a shared-risk pension scheme) or defined contribution (DC), corresponding to the different types of promise offered by each scheme.
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CDC schemes are designed to bring greater clarity to members on their pension outcome at retirement by sharing risks between all scheme members by pooling the investment in one fund.
The schemes also offer members fixed contributions and the ability to share responsibility for retirement saving with their employers.
Risk-sharing could mean lower pension charges and operating costs and access to different types of asset for employees to invest in. This could boost diversification, providing them with more stable returns in retirement.
But there is a danger that CDC schemes may create a false sense of security about retirement income for members if they are not structured correctly.
There are also concerns about the fairness of schemes across different generations of employees, whether risks are properly managed and whether CDC schemes can work effectively against the background of an ageing workforce.
The legislative framework could come into effect in time to be considered by schemes facing the end of DB contracting out.