Following a Government consultation into flexible defined benefit (DB), guaranteed defined contribution (DC) and collective DC (CDC) pension options for employers, a spokesman for the Department of Work and Pensions (DWP) has indicated that the changes required from its findings will require “some sort of legislative vehicle”.
However, Pensions minister Steve Webb has admitted that he has failed in his attempts to introduce legislation that will enable CDC schemes to be set up during this Parliament.
This is despite reports last month suggesting that measures to support CDC schemes, in which members’ contributions are pooled and the pension is paid from the collective fund, would form the “centrepiece” of a Pensions Bill before the May 2015 general election.
Instead, the DWP spokesman said, if the subject comes up in the Queen’s speech then the Government would expect the matter to be included in a Bill in the next parliamentary session, with the changes coming into effect before the end of contracting out in 2016.
If CDC does become law from April 2016, employers who still offer DB schemes could find that they become unaffordable, as they will no longer benefit from the reduction in National Insurance Contributions from their employees.
They should therefore consider a CDC scheme, which is where members’ savings are pooled together into a collective fund rather than in individual accounts, as a desirable alternative to implementing a DC arrangement in 2016.
A CDC arrangement will cost employers the same as a standard DC pension scheme, with no extra risk, while offering scheme members average pensions of over 30 per cent higher than a typical DC scheme with the same contribution levels.