New collective pension arrangements based on risk-pooling models, such as those in the Netherlands, are set to be legislated today (26 June) following a public consultation which revealed big support for the shake-up.
‘Collective’ defined contribution pension have been widely touted as a potential saviour of more secure income at a time when final salary pensions are in decline.
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.
Ministers believe that pooling money in this way will help increase the retirement incomes of some workers up to 30 per cent.
Legislation will now be brought forward to enable “new, internationally-renowned” models of pension scheme to be brought to the UK market, after responses “showed a broad consensus of backing from business, trades unions and individuals”.
The purpose of the new legislation will be to enable employers to develop shared risk – or defined ambition – schemes which offer more certain outcomes for their workers, while still keeping costs under control, the government said.
In November the government published its consultation paper on so-called ‘defined ambition’ pension schemes that it believes can rescue the ‘defined benefit’ model by sharing risk between employers and savers, and offering greater flexibility.
In its official response published today (26 June), the Department for Work and Pensions outlined the feedback received for the proposals.
New research has shown 28 per cent of employers may be interested in greater risk sharing with their employees, the DWP said.
It also demonstrated a “clear preference” among individuals for greater certainty over their finances.
As such, the response document commits to enable these ‘defined ambition’ schemes to be developed, and a Bill will go before Parliament today.
The DWP said “many employers” have expressed an interest in taking forward these new models of pension schemes, “once it becomes legally possible”.
However, CDC pensions have been widely criticised by industry experts with pensions expert Ros Altmann stating while there is a place for such pensions in the market, the government should not “over-hype” the benefits of the plans.
She said the advantages are employers pay fixed levels of contributions, typically around 10 to 12 per cent of the employee’s salary, and are in return offered a ‘target’ level of pension related to average salary, as well as the chance to to protect against inflation.
Ms Altmann added there is no balance sheet risk to employers, there is less risk for employers and members than pure DC, and pooling investments allows lower management costs and higher pension fund.
However, in exchange for these advantages, Ms Altmann warned that pensions are “at the mercy” of market and actuarial forecasts that are often “too generous”, which could result in the expected level of pension income having to be cut.
Business advisory firm Deloitte also raised concern that CDC funds are often forced to cut pensions in payment if deficits rise.
Deloitte research found 55 out of 415 Dutch funds reduced income in 2013 alone.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said larger pools of money could result in lower charges, but he echoed Ms Altmann’s warning of a likely lack of demand by saying this would schemes to “achieve a scale we doubt employer demand would support”.
Both Mr McPhail and Ms Altmann said enthusiasm for the model may be dampened by its similarities with previously popular ‘with-profits’ funds, which aimed to smooth payments to members over time and fell out of favour due to poor management and over-optimism.
Pensions minister Steve Webb said: “This coalition government has already made fundamental reforms to the pensions landscape. These new proposals are all about encouraging a flourishing and diverse private pensions market by providing greater choice to employers and savers.
“These reforms meet the needs and concerns of business while, at the same time, standing up for the interests of workers who are doing the right thing and saving for their retirement.
“With the backing of consumers and industry, this Bill will bring about new and realistic pension scheme options for those employers who want to do right by their staff.”
