Aon Hewitt has called on UK employers to start considering Collective Defined Contribution (CDC) pension schemes as a viable pension arrangement, ahead of the abolition of contracting-out in 2016.
Matthew Arends, partner at Aon Hewitt said:
“The end of contracting-out in 2016 will mean increased employment costs for employers as they will no longer benefit from the reduction in national insurance contributions for their employees. We estimate that this could result in additional cost of around 2.5% - 3% of total payroll for DB members. For employers who still offer defined benefit (DB) schemes, this may simply make them unaffordable. We urge them to start considering Collective DC now as a desirable alternative to implementing a defined contribution arrangement in 2016. We also call on the government to provide some certainty as to the timetable for implementing CDC.”
CDC schemes are pension schemes where members’ savings are pooled together into a collective fund rather than being held in individual accounts. By pooling assets, the impact of market volatility on individual members' fund values is reduced and access to additional asset classes, such as more illiquid assets, becomes available. As the scheme also pays the pension, thus avoiding forced annuity purchase, this results in overall materially improved member outcomes, as demonstrated by Aon Hewitt's comprehensive research.
Matthew Arends said:
“A Collective DC 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% higher than a typical DC scheme with the same contribution levels.”
Currently, Collective DC schemes are not legally permitted in the UK, although they are popular in several other countries including Canada and the Netherlands.
The Department for Work and Pensions (DWP) is shortly due to publish the outcome of its 2013 consultation on workplace pensions, ‘Reshaping workplace pensions for future generations’, including the viability of new arrangements such as collective DC pensions.
Pending confirmation from the DWP, Aon Hewitt expects that collective DC will be enshrined in new legislation in 2015, taking effect from April 2016.
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