PensionsSep 23 2014

Conditions must be met before CDCs can work in UK

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Age, culture and taxation are just three of several barriers to bringing in the government’s proposed collective defined contribution schemes, Djuna Thurley, pension policy specialist at the House of Commons has suggested.

In a 53-page report outlining the government’s proposals to usher in a shared risk form of pension scheme, published in the Business and Transport Section, collective pension schemes could be perjorative to younger contributors.

According to the report, “A number of commentators have objected that CDCs are unfair to younger contributors. The government acknowledges this as a potential issue but points out that the way in which risk is shared between different groups of members depends on how the scheme is designed.”

It pointed to the way in which uniform accrual and contribution rates work in the Netherlands, meaning an older person joining the scheme later in life will get a lower premium than those joining at a younger age.

The report suggested: “Consideration of possible remedies, such as age-related accrual rates or premiums would need to take account of equality legislation.”

However, looking to the Netherlands might not always provide the right answer; the report highlighted concerns from industry players such as Now: Pensions and the Pensions Policy Institute, which suggested that only if the UK government intervenes would sufficient scale be achieved.

Also, in the Netherlands and Denmark, compulsion has been around for many years, and the pensions market is highly unionised, so that people from similar professions share risk with one another.

However, the UK market’s form of risk-sharing under current proposals has manual workers possibly sharing risk with white collar workers, which has been called an “unfair approach” by Morten Nilsson, chief executive of Now: Pensions.

The report suggested: “There may be cultural barriers to the introduction [of CDC pensions] here.”

It also questioned whether CDCs would work “in an environment where, following the announcement in the Budget 2014, individuals aged 55 and over would have flexibility to draw their pension saving as and when they choose, subject to their marginal rate of income tax.”

Should CDCs be implemented as proposed, inter-generational risk-sharing would become “extremely difficult” if people left the system at age 55.