Looking beyond the hype over CDC schemes

Tony Hazell

Tony Hazell

What can you do with a couple of terms’ Parliamentary time when you are a government that has run out of ideas?

I know – let’s turn to Steve Webb who has always got something on the back burner.

Thus, one of the few interesting pieces of legislation over the coming year will pave the way for Collective Defined Contribution pensions.

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The move grabbed a few positive headlines with one claiming, rather implausibly, that it could boost pensions by 30 per cent. In your dreams, buddy.

Such claims, leading to unrealistic expectations, are precisely what CDC pensions do not need.

Critics have been lining up to dampen down expectations. And there are undoubtedly questions over whether CDCs could be successful in this country.

For starters, a collective scheme goes against a generation of pensions legislation that has consistently moved towards individual pots and individual responsibility.

It has also been pointed out that those in collective schemes are unlikely to be allowed to transfer out and benefit from the new pension freedom announced in March’s Budget.

Then there is the question of who will run these schemes? Actuaries have not got a great track record of forecasting or recognising changes that can have a major impact on collective schemes, as anyone who invested in with profits can testify.

Imagine the outcry if pay-outs were to drop three-fold or four-fold as they have in just 15 years on with profits.

Once up and running, such a scheme will need considerable new money coming in to maintain its ability to keep up good levels of pay-outs to those who have retired. This implies no more fiddling with pensions after the current shake-up.

It has been pointed out that some Dutch pensioners in such schemes have not had their pensions increased for a decade.

But I do not see this as such a barrier. If this happened they should still be a lot better off than if their pension had been eaten away by charges and then an insurance company had taken a further bite when they bought an annuity.

Having said all of this, CDCs should be a welcome addition to the new pension landscape offering a further option to employers and employees.

For employers they would offer an attractive staff benefit without the open-ended risk of defined benefit pensions. For employees, it should provide a decent pension – possibly better than they would get from a standard DC scheme.

The key is that staff must be made aware that there are no guarantees.

And for goodness sake let us have them run by people who understand numbers.


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