A pensions overhaul, which will see companies able to pool larger savings schemes into one for better investment, will be unveiled by ministers today.
The move to introduce larger, collective pots would increase pensions by as much as 60 per cent, the Government said, as well as providing better income security.
Unlike defined contribution (DC) schemes, pensions known as collective defined contribution (CDC) allow employers to pool multiple schemes into one.
This means there is more security and higher average incomes throughout retirement when compared to individual pension pots, the Government said.
Pooling the pension funds will also allow for bigger investments in assets such as UK businesses and infrastructure projects.
But CDC schemes also do not guarantee a specific income. As a result, the pensions paid to members can fluctuate.
Pensions UK said the schemes “have the potential to boost retirement savings by sharing risks between savers”.
Zoe Alexander, head of policy, said: “Success depends on striking the right balance between strong protections for members, simplicity and fairness of scheme design.
“We agree with the Government that innovation in CDC carries huge promise for savers and are pleased that this Government is supporting the development of both multi-employer and at-retirement CDCs.”
Minister for Pensions Torsten Bell said collective pensions would “offer a better deal” to savers “where risks are shared, returns are smoothed and retirement incomes are stronger and paid for life”.
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“By expanding CDC to more employers and consulting on retirement CDC, we are helping build a fairer pensions system that gives people confidence their hard-earned savings will last and they can enjoy their retirement,” he said.
In a so-called CDC scheme, both the employer and employee contribute to a larger collective fund, which is then paid to members in retirement.
The main advantages of this type of pension scheme are the potential for a longer-term investment strategy than defined contribution schemes.
But pensions in CDC schemes are not guaranteed, which means that the pensions paid to members can fall.
The Government is also consulting on a scheme that would allow savers to transfer their money from a traditional scheme into a CDC investment scheme when they retire.
Nausicaa Delfas, head of the Pensions Regulator, said “innovative solutions” such as the retirement-only CDC schemes could play a part in providing a “sustainable income” for retirees.
She said: “I’d encourage people to get involved with the upcoming consultation to ensure their ideas are heard.”
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