Personal Pension  

Market View: Don’t believe the hype on pooled pensions

A new form of ‘collective’ defined contribution pension which has been widely touted as a potential saviour of more secure income at a time when final salary pensions are in decline is ‘over-hyped’ and leaves pensioners “at the mercy” of market forecasts, one expert has said.

Proposals for the new money purchase model, based largely on schemes popular in the Netherlands and included as one of seven proposals to save DB pensions by the government last year, are widely anticipated to be centre stage at the Queen’s speech on Wednesday (4 June).

The speech, which takes place at the state re-opening of parliament, outlines the legislative agenda in the parliamentary session in the lead up to the 2015 election and is likely to focus on CDC as well as other pension reforms, according to widespread reports.

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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.

Consultant Ros Altmann said there is a place for such pensions in the market, but she warned the government should not “over-hype” the benefits of the plans and stated recent Budget reforms may undermine appetite for the schemes.

Ms Altmann said: “The new Budget pension freedoms may mean people prefer pure DC that they can access in retirement if they wish to, as CDC usually means they cannot just take cash.”

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 adde 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. It’s own research found 55 out of 415 Dutch funds reduced income in 2013 alone.

Tony Clare, pensions advisory partner at Deloitte, said: “Many Dutch pensioners have experienced falling pensions and standards of living as a consequence. Once a scheme member retires, the options to rebuild pension savings become more limited.

“Contributions to some Dutch funds also tend to increase during economic downturns as their trustees prefer this solution to cutting benefits to deal with deficits. The result can be that employers’ pension costs increase and employees’ take home pay reduces just at the time when people and business can least afford it.