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 report.
The 53-page report, Defined Ambition Pension Schemes, said the Pensions Schemes Bill 2014/2015 would provide for new categories of pension schemes: defined benefit, shared risk and defined contribution, as well as a framework for schemes to provide collective benefits.
However, the report highlighted “certain conditions” that needed to be met for them to be successful, saying: “Some commentators have objected that collective defined contribution schemes are unfair to younger contributors”.
This is because typically they would bear more risk, for longer, than older workers. The report said: “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 highlighted the way that 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 one joining at a younger age.
Should CDCs be implemented as proposed, inter-generational risk-sharing would become “extremely difficult” if people left the system at age 55.
However, “consideration of possible remedies, such as age-related accrual rates or premiums would need to take account of equality legislation”, the report added.
The report also highlighted concerns from industry players such as the Pensions Policy Institute, which suggested that only if the UK government intervened would sufficient scale be achieved to make CDCs as successful as they are in the Netherlands and Denmark.
It said: “There may be cultural barriers to the introduction [of CDC pensions] here”.
Moreover, in countries such as the Netherlands, 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.
Adviser view
Shane Mullins, managing director of Nottingham-based Fiscal Engineers: “We just need some joined-up thinking on pensions and some sensible narrative from government to meet the needs of people on the street who will struggle to afford retirement and live in reasonable comfort without having to rely on the state. Government is trying to fix the system and breeding more confusion, without actually considering the purpose of the system: namely to help people save for their retirement.”
