Plans to introduce so-called ‘collective defined contribution’ pension schemes such as those available in the Netherlands are not a panacea and could present fresh risks as they “rely on a constant flow of new members for long-term sustainability”, a pensions expert has warned.
Pensions minister Steve Webb’s briefed The Times on the centrepiece to his vision for reforms to introduce ‘defined ambition’ pensions to replace troubled final salary schemes, in which he said workers could increase their pension by 30 per cent in exchange for fewer guarantees.
Last year, Mr Webb touted CDC schemes as one of seven proposals to save defined benefit pensions.
Under the CDC model, contributions are not retained in an individual fund for each member but are pooled. When a member retires the income is paid from the asset pool rather than through the selection of an individual retirement income product.
The model is similar in structure to the Dutch General Practitioners’ pension fund and the mandatory ATP scheme in Denmark.
However, Tom McPhail, head of pensions research at Hargreaves Lansdown, warned CDC schemes are similar to a “with-profits fund” in that they work by “sharing risk across a broad pool of investors”.
They don’t necessarily produce higher investment returns than any other type of scheme, he added, “but their claimed advantage lies in being able to share costs across members and the increased scope for members to remain invested in risk-assets such as company shares”.
Mr McPhail warned that the danger with these schemes lies with the risk controls and ‘with-profit’ funds are an example of how they can members can find payouts being cut if they are not properly regulated or if the investments fail to perform to expectations.
He said: “Claims to be able to boost pension payouts at no additional cost or risk are always going to prove popular (particularly in the run up to a general election). The arguments in favour of these schemes [CDC] are unproven.
“There is clear evidence both from recent Dutch experience and from our own with-profits funds that such schemes can go down as well as up. They are complex, uncertain, unproven and rely on a constant flow of new members for their long-term sustainability.’
“We believe that much can be done to improve the existing UK pension system. A well-judged price cap on auto-enrolment schemes, reform of the regulations on the sale of annuities and the promotion of long term investing would all have long lasting and beneficial effects.”