Steven Cameron, Pensions Director at Aegon comments: “As of now, large employers can apply to offer their employees a new form of Collective Defined Contribution scheme, with the Royal Mail already committed to offer this to its employees. Some other countries already offer schemes of a similar nature. They’re designed to give members more assurances of the benefits they’ll receive compared to Defined Contribution schemes where members bear all the investment risks, while avoiding the guarantees of Defined Benefit schemes which place a highly costly unlimited funding liability on employers. An underlying concept is members share risks of investments outperforming or underperforming and also of some members living much longer, so receiving their pension in retirement, longer than others. However, there are many complexities and it will be important that members understand these, including that ‘target’ benefits are not guaranteed and can go down as well as up even once their retirement income is being paid.
“Rightly, new legislation sets very stringent rules for the running of such schemes, to make sure they are designed fairly, run on a financially sound basis and provide good member outcomes. They must also be equipped to explain the many complexities to members. This is crucial as many of the millions who are automatically enrolled may not currently ‘engage’ with the details of their scheme. Initially, this will make them viable only for the very largest of employers.
“However, the Government is planning to consult on possibly allowing schemes to be set up on a ‘multi-employer’ basis. This will raise new challenges around financial management and fairness between members but if workable, may open the door to a new form of workplace pension for a wider range of employers and their employees.”
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