Collective Defined Contribution CDC Pension

Published / Last Updated on 30/09/2014

Video explains Government's proposed Collective Defined Contribution CDC Pension which are based upon Dutch pensions and a half way house between final salary schemes and investment/money purchase linked pensions.


"Hello there.  Here's a new type of pension for you that's been passed in the Finance Act of 2014 and it received Royal Assent [Summer 2014] so it becomes part of the Finance Act [i.e. Law].

So, a new type of pension that the government is consulting on introducing, called the Collective Defined Contribution scheme (CDC) collective defined contribution scheme.

So at the moment we have:

i) State Pensions
ii) we then have Company pensions which are a mix of Final Salary and Career Average salary-related pension schemes and company linked investment schemes (Company Money Purchase Schemes) and
iii) then we have a third tier for private pensions: Personal Pension, Stakeholder Pension,  Self Invested Personal Pensions etc.

We essentially have three different layers of pension schemes available to different types of employee.

Now, the problem that we have is final salary schemes, defined benefit schemes are starting to disappear.  Even the government is starting to change how their salary-related pension schemes work for Teachers, for the Fire Service, for the Armed Forces, for the NHS etc. Lots and lots of big companies have already moved away from these defined benefit, final salary schemes moving towards basically investment linked schemes.  Investment linked schemes as a general rule well it comes down to you how much is your investment going to grow.  

There are no guarantees, so what the government have looked at is they've explored and how the Dutch pension system works.  The way the Dutch pension system works is they have the state pension, called the AOW, the old age pension in Holland [the first pillar].  They then have the third pillar which is private pension schemes, much the same as ourselves. 

Then smack in the middle they have collective defined contribution schemes.  And the way a collective defined contribution scheme works is:

  • its more than just a company pension scheme
  • it could be collective as an industry, think of it like this is the 'builders scheme' or this is the 'teachers scheme' or this is the 'plumber's scheme' or whatever it might be or this is the finance industry scheme

So huge, absolutely massive supertanker collective investment pension schemes, collective defined contribution schemes.  

And the way they work is it sort of halfway house between a salary -related final salary scheme career average salary scheme and an investment linked scheme.  Basically, the way these schemes work is term you pay your premiums, set premiums every month and likewise your employer pays a set premium into the same scheme.

I'll make it make it up  Let's say its 2% of your salary and for every 2% of your salary what you actually get is one year's credit towards this pension at the end.  And the pension at the end is usually set by a mix of government and these huge supertanker schemes where they say the maximum pension is e.g. €1000 a month.

Now, if you've paid your 2% and your employer combined and you get one years credit.  Let's say to get 100% then you've got to have paid in 50 years or whatever it might be or if you paid in contribution you get 2% credit and all that.  But the 'long and short' is if you, let's say achieved maximum qualification i.e. 50 years worth of qualifying payments gives you 100% of the amount [pension].  It gives you 100% of what they've set as the maximum pension scheme.

So I know that sort of a little bit backward in the way I said that, but just think of it like:

  • Well, if I have to pay 50 years to get 100% of the set value of pension then that's what I do.
  • Or if you paid in 25 years you get half of what this maximum pension would be.

The way the Dutch schemes work is they are huge, huge investment linked pension schemes and by making them such a huge, collective of all thousands of people saving together that they got really low charges [economies of scale].  

So really low charges means you can actually try and get better investment growth but there's the 'key' to this: it is it still a supertanker investment fund that can rise as well as fall. Each year the maximum pension is set and you're then entitled to whatever pension percentage you're entitled to of that scheme.

But these are coming.  The government has legislated for it already so you're soon going to have a fourth choice of a type of pension scheme called a collective defined contribution scheme.  Like I said [a] sort of a halfway house between a guaranteed, salary related, final salary scheme (defined benefit) and a non-guaranteed, collective investment, money purchase, company pension scheme.

We are going to have this extra one sat in the middle similar to the Dutch scheme called a collective defined contribution scheme.  Quite complex, I know, and we have'nt got all of the rules as yet but do contact me if you would like to know more.  Thanks very much for watching."

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