Collective Defined Contribution Schemes

These are occupational pension schemes which have some elements of standard defined contribution schemes and some elements of defined benefit schemes. The key points to these are:-

  • These are risk sharing (or target pension) plans widely used in several other countries including Canada and Holland, and which are expected to soon be permitted in the UK.
  • Each year the employer and employee pay in contributions which are a fixed percentage of the employee’s pay.
  • As a consequence of this the employee builds up a ‘target’ pension amount based upon their pay.
  • At retirement, pension income is not secured by an annuity purchase like a standard defined contribution arrangement, instead it is paid out of the cumulative collective fund built up for all members of the scheme.
  • Unlike a defined benefit scheme whilst a particular pension income is targeted there are no guarantees that it will be met.

These will often provide benefits broadly similar to those offered by a defined benefit scheme (such as lifelong pension income with annual increases, automatic tax-free retirement lump sums, and death in service benefits for a deceased member’s spouse) however unlike a defined benefit scheme the exact level of these benefits is not guaranteed and will be subject to factors such as the performance of the scheme’s investments.

Currently there are no such schemes available in the UK, though one company, Royal Mail, is planning to introduce a scheme of this type once this is permitted under UK law from early 2021.