Younger people may view the government’s new ‘collective’ defined contribution pension schemes as “inter-generational Ponzi’ schemes which effectively involve savings subsidising retirees’ pensions.
The Department for Work and Pensions announced today (26 June) that it is set to press ahead with CDC pension arrangements.
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.
However, pensions expert Ros Altmann previously warned that the outcome of CDC schemes rely on “inter-generational risk-sharing” and reliability of actuarial forecasts.
Speaking to FTAdviser, Jim Boyd, director of corporate affairs at Partnership, said: “CDC schemes work by sharing risks between all members, pooling the investment in one fund.
“Although this does bring down overheads, it also involves transferring risk from the old to the young with the younger members bearing the risk of potentially reduced future payouts to ensure the benefits of older members are preserved.
“From one perspective CDC can be seen as a with-profits fund, however young people might be forgiven for viewing CDC as an inter-generational ‘Ponzi’ scheme.”
Tom McPhail, head of pensions research at Hargreaves Lansdown, told FTAdviser he would “probably agree” with Partnership’s ‘Ponzi’ description.
He said: “The nature of ‘with profits’, the issue around ‘cross-subsidy’... if you have a conveyor belt of new members you can achieve stability potentially.
“But there is a risk, as we have seen in Holland, that if the actuaries get their sums wrong, there is a potential situation where we are running at a deficit and the problem is that new members may have to fill the deficit that exists.
“It’s not a problem until it does happen.”
However, Danny Wilding, partner at Barnett Waddingham, is more positive about the schemes. He said that CDC schemes can reduce the cost of pension provision by pooling the costs, with the next stage being pooling investment risk.
He said: “An employer taking advantage of the legislation can choose how much risk they want to pool, at the simplest stage they can pool the expense risk, the next stage would be to offer investment funds that members could join.
“Individuals would be able to access strategies that they would not be able to as there would be economies of scale from pooling with other members.”
When asked whether they could be described as an “inter-generational Ponzi”, Mr Wilding emphasised that CDC schemes will not be about one model.
He said: “CDC schemes need to be clear as to what is pooled and what isn’t - there is no requirement for everything to be pooled. To begin with, I imagine we will see modest pooling.
“If each agreement is clear as to what risks are being pooled and how communicating that to members it is not a Ponzi. The problem comes when people don’t understand what they can get and what risks they can face; what their share of the pool will be if they leave or retire. They need to understand how it operates.”
