Managers of the new collective pension schemes face strict new rules set out by the Pensions Regulator, ensuring members are fully aware of how the scheme operates.
In this guide, we’ll be explaining what the new pension schemes offer and the strict new rules imposed by the regulator.
What are Collective Pension Schemes?
The Pensions Schemes Act 2021 includes a number of pension changes, including the introduction of a new form of pension scheme called the Collective Defined Contribution (CDC).
Although most UK employers and employees are familiar with the defined benefit (final salary) and defined contribution (money purchase) pension provision, many are less clued up on the new CDC schemes.
A CDC scheme can be set up under trust by a single employer or group of connected employers. It is a type of hybrid scheme that combines elements from both defined contribution and defined benefit.
Defined benefit schemes offer a guarantee as to the level of pension benefit received at retirement, whereas the level of pension in a defined contribution scheme is dependent on the amount of money in the member’s fund.
CDC schemes are similar to defined contribution schemes as the contributions are fixed and there is no guaranteed level of benefits, however CDC schemes target a specified level of benefit.
Much like a defined contribution, the attraction for employers is that that they are only required to make fixed contributions to the CDC scheme and don’t have any further liability to make sure that the member receives a certain level of benefits.
The CDC Scheme target pension is defined as the pension which is provided based on employer and employee contributions and investment return. This means that the pension isn’t fixed each year, but the amount will be adjusted to reflect inflation.
Members will still be able to choose whether to take benefits from the CDC scheme or to transfer them to access drawdown or to purchase an annuity.
What are the Changes to the CDC Schemes?
The Pensions Regulator proposed strict new obligations for CDC Scheme providers when setting out its plans for how the schemes should operate. A draft code published two weeks ago will ensure CDC schemes review and maintain communications with their members regularly and establish whether members have a clear understanding of the communication and the risks involved with the scheme.
Steven Taylor, partner at LCP, the actuarial consultants said:
“The draft code sets out that members need to be given all the information necessary to understand this new type of scheme. The initial communication exercise when setting up a CDC scheme will be a sizeable and crucial task to ensure members appreciate the value and the risks within the new schemes.”
These new rules come after controversy arose in the Netherlands when members of CDC schemes saw unexpected cuts to their income.
Matthew Arends, head of UK retirement policy at Aon said:
“Good communication for pension schemes is necessary but particularly for CDC ones. CDC schemes bring something new to UK pensions in that the income offered for life could go down as well as up.
Because this is new, it is absolutely right that [the regulator] has clear guidance on what constitutes clear communications with members. It is imperative that members understand the risks and benefits of the scheme.”
The regulator plans to start accepting applications from August 2022, from employers and trustees looking to set up CDC schemes for their employees.
Currently, Royal Mail is the only UK employer moving to offer staff a CDC scheme.
Retirement Strategies with Ryans
Everyone hopes to maintain the same standard of living in retirement as they currently enjoy while working, if not better. Like many things, considerable forward planning is required in order to achieve this.
Have you made adequate pension provision, and do you have the right type of pension?
Are you aware of all the pension possibilities open to business owners and directors? Are you making full use of all your allowances?
We can help you answer these questions and recommend solutions tailored to your particular needs so you can enjoy the retirement you deserve after years of hard work.
For more information and advice about your pension and retirement strategies, please don’t hesitate to reach out to our team at Ryans who will be happy to discuss how our services can help you.