A new type of pension is on the cards for UK savers which, if it passes through the parliamentary process, could offer something of a “half way house” between defined benefit (DB) and defined contribution (DC) pensions.

The potential advantage of the proposed Collective Defined Contribution (CDC) schemes is that they will be more affordable for the employer than DB schemes while offering greater security for members than DC schemes.

CDC pensions are not new internationally: a number of countries offer variations on them, including Denmark, Holland and Canada. They operate by both the scheme member and employer making contributions into a pension pot that grows over time. However, this pot is shared between all scheme members, rather than each individual member saving into their own pot – so pooling the risk and returns.

When it comes to taking money out of the pot, members can keep their funds where they are, invested in a larger scheme which is invested for continuing growth, rather than going to the market looking for a vehicle such as an annuity or drawdown pension. This way they are not subject to the day-to-day volatility in values that can make a difference depending on when a pension pot is withdrawn.

That also reduces the risk of a person running out of money during their lifetime because they have drawn down the total value of their pot.

While they may not have some of the benefits of a DB scheme, with a CDC scheme, there is less risk of employers finding themselves with a black hole to fund.

There is still work to be undertaken in Parliament to iron out the details, but we may be seeing the new style pensions in action quite soon: the first CDC scheme to be launched will be Royal Mail’s, and this will provide a working example to see how the new style pensions will operate in practice.

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