There's a new pension in town, and I think that
this is the biggest change to the way we fund
our retirement in decades. This is a big one.
It's called the collective defined contribution
pension. And it's different to any other pension
that you may be familiar with, unless you're
a postal worker, but more about that later. So
if we consider the three current types of pension,
that I talked about in the UK. Then we have the
state pension. And this is a benefit that's paid
to those over the age of 67. And it's paid from
the taxes that the government raises each year
from people who are still working in the UK.
Now, there's no pot of money collected from which
the pensions are to be paid. To be entitled to
it, you just need to have worked and paid national
insurance in the UK during your working life.
Generally, the longer that you've been working,
the more you're entitled to up to a limit, which
is near £12 ,000 per year. It wouldn't have mattered
if when you were working that you'd earned £2
million a year or £15 ,000 per year. Your pension
would be exactly the same, as long as you've
been working for the same amount of time. Now,
the other two pensions are different. they do
rely on how much you earned and how much you
contributed each month. So these will determine
whether, for example, you can retire early or
retire with a large pension that will fund a
much more lavish lifestyle in retirement. So
they're called DB and DC pensions. full names,
defined benefit and defined contribution pensions.
Now, if you go back 30 years in the UK, you would
see that DB pensions were really popular and
lots of big companies offered them to their employees.
But they're much less common now and they're
mainly only available to those working in the
public sector. Now, in short, a DB pension is
a promise made by your employer to pay you a
set pension that depends on how much you earned
and how long you worked for them. It was a fixed
pension that would usually get every month until
you died. And when you died, it stopped, other
than whether you had a widow's pension. What
a defined contribution pension or a DC pension
is, is very different. And this is money being
collected off you every month, being invested
for you. Your employer then chips into the pot
as well. And then when you retire, the money's
yours. Now, how much you take each month out
of that pot of money is kind of up to you as
well, really. You could if you wanted to. go
and blow it all in the first year of retirement.
Or you could try and stretch it out till you
die. Or even further, you could stretch it out
and then after you've died, have some left, which
you could then pass on to your family, subject
to inheritance tax, which I'm not going to cover
here. Now, your employer has not made you a promise
on how much you get. And if the way it was invested
meant that you didn't get as much as you had
hoped for, then your employer's off the hook.
They don't need to top it up. They've made no
promises. So what's this new pension in town?
What's it all about? It's the CDC pension. Now
it works by combining features of both the defined
benefits and the defined contribution pensions.
So both the employer and the employees contribute
into a single pooled fund. A pot of money that's
invested collectively provides what they call
a target pension income in retirement. Now, unlike
a traditional defined contribution, the risk
is then shared across all the members in that
pool rather than just the individual savers.
So if the fund performs well, then pensions can
go up. If it underperforms, then pensions may
decrease. This model aims to offer a more sustainable
lifetime income than individual DC pots. But
it avoids the employer guarantee of the DB schemes,
which made them so unpopular in the first place.
So how does this CDC pension work? Well, from
a contribution perspective, both your employee
and your employees contribute to this collective
fund. And as I said, the investment then is pulled
together. and invested together by professional
managers to seek higher returns than individual
schemes. But also the risk is pooled then. But
because the money's not still payable after you
die, like it would be in a DC, that money goes
back into the pot. So if less people live longer
in your pot, then you may receive more pension.
Also, It's not guaranteed like a traditional
DB pension. There's no onus on the employer to
top it up. Now, the amount the pension paid can
be adjusted year on year, depending on the performance
levels of the fund. But this... pooling of these
resources can minimize operating costs as well
because it's a bigger pool therefore there's
less operating costs as well now employers as
well have much more predictable contribution
costs similar to a dc plan where there's no guarantees
and they really do not have to guarantee that
final pension amount in the traditional defined
contribution your retirement income depends solely
on your and your employer contributions and then
the investment performance of that individual
pot of money but in the cdc plan the risk and
rewards aren't like that they're shared across
larger groups now this will steady things out
in terms of risk and give you a much more predictable
income Now, if you also compare the CDC against
the defined benefit, what's different there?
Well, the defined benefit promises a specific
income, and that'll be based on the salary that
you earned and the length of time you were with
an employer, and it's guaranteed by the employer.
Now, this puts the investment and the longevity
risk, as in how long you live, back onto the
employer, where the CDC scheme don't have this
employer guarantee. But they can be more sustainable
and cost effective for the employer while still
aiming for a similar kind of lifetime income
for the employees with the big difference being
there that when you die, the pension dies with
you. So I mentioned that this is coming in and
the Postal Service in the UK has had it for a
while now. It's been really well received and
actually promoted by the... postal workers unions
like the communication workers units the cwu
the cwu was actually instrumental in developing
and campaigning for this cdc scheme at royal
mail and for them it was a crucial outcome of
negotiations with the company the cwu's main
goal was to secure this wage and retirement for
their members and this kind of income for life
which they felt was missing from standard defined
contributions. As I say with a standard defined
contribution you can pretty much take the pension
and blow it in the first year should you choose
to do that. Now the CDC scheme is designed to
provide this target but not guaranteed income
and you know generally it's thought that that's
better than a DC. Now the union strongly prefer
the CDC over the individual defined contribution
pension schemes that the Royal Mail had initially
proposed to employers after they closed their
traditional DB type scheme. They believe that
the CDC offered better expected outcomes, a more
predictable income and also this pooling of risks
and this longevity risk as in The more people
die, the more everyone else gets. There's also
a higher member approval. Reports from the CWU
indicate that the agreement, which included the
CDC scheme, was incredibly well received by the
postal workers, with a very high percentage voting
in favour of the deal. So the CDC scheme is seen
as this middle way between the old style, expensive
to run, DB schemes which give a guaranteed pension
income and the lower risk but uncertain outcome
of the defined contribution schemes it offers
a target benefit not a guaranteed benefit but
it fixes the cost for the employer so in summary
the postal workers as represented by their CWU
view the CDC pension scheme generally as significant
and positive step that provides a better path
to retirement security than maybe a standard
DC scheme, especially given the closure of their
original traditional DB scheme. So they are headed
our way. A lot of employers are looking at CDC
schemes now. What do you think? Let me know in
the comments whether you think you'd prefer to
have a CDC scheme at your employer. See you next
time.