What's a collective pension scheme?

Chris Torney / 24 March 2015

A new type of pension scheme is being put forward as a possible solution to the problems many people in Britain face when saving for retirement. Chris Torney explains how collective pension schemes work and how they differ from the current workplace pensions in the UK.



A collective pension scheme is designed to hold the investments of tens of thousands of people who are working in certain industries.

By pooling together savings from so many, it is argued that collective schemes can generate higher returns and provide greater certainty over the size of the pensions that members will eventually receive.

These schemes are currently very popular in the Netherlands but have yet to become established in the UK.

What are the current pension options?

At the moment, most workers’ pensions fall into one of two groups.

⚫ Defined benefit and their employers paying regular or final-salary schemes involve workers contributions into the pension. But the income that the worker gets when they retire is guaranteed and normally stated as a proportion of their annual earnings at the time of retirement.

The phrase ‘defined benefit’ is used because the worker knows or has a good idea of how much money they will get – and it is up to the employer to underwrite this guarantee.

⚫ With defined contribution (DC) or personal pensions, workers still save into their fund and employers may as well. But the final size of the pension – and therefore the income it can generate – depends on how much has been saved and how much the fund’s investments have grown: there are no guarantees.

This type of pension has become much more common as it puts less financial strain on employers.

Read our guide to the different types of pension.

How do collective pension schemes differ?

A collective scheme is a type of defined contribution pension: workers know how much money they put in but don’t know how much they will get out.

Supporters of collective pensions say that the average costs of running them are lower than normal defined contribution schemes because they have more members.

They can also invest in longer-term assets, such as infrastructure projects, which may produce better returns.

Some studies have shown that collective schemes have outperformed defined contribution pensions in the past, but this does not mean it will always be the case.

And the UK government has recently announced a cap on charges on defined contribution pensions, which means the difference in running costs may be lower in future or even wiped out altogether.

The pension rules are changing. Find out more.

Are collective pensions likely to take off in Britain?

Setting up a collective scheme would involve a large number of employers working together. At the moment, the government is rolling out its auto-enrolment pension plans, which mean that practically every company in the UK will soon have to offer employees a workplace pension.

This makes it less likely that firms would agree to implement a new type of pension in the near future.

The opinions expressed are those of the author and are not held by Saga unless specifically stated.

The material is for general information only and does not constitute investment, tax, legal, medical or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.