The government wants to encourage innovation in the pensions industry without dictating how the schemes will look, as it continues to create the collective benefits scheme framework.
Earlier this week, FTAdviser revealed that industry experts are calling for ‘collective’ defined contribution schemes to be the default option for DC members, following the radical overhaul of the pensions system announced in the Budget last year.
In response to this, a Department for Work and Pensions spokesperson told FTAdviser: “We are creating the framework for collective benefits and defined ambition schemes to provide a new class of pensions.
“This means that we can encourage innovation in the pensions industry, without dictating any particular set design for these pension schemes.”
FTAdviser understands the government is trying to create a space for innovation by the pensions industry, which includes legislating for schemes providing collective benefits, and separately, defined ambition schemes.
Once the final stages of parliamentary scrutiny on the Pensions Bill are concluded and, depending on the outcome of that process, the government will be able to set out more clearly the steps it will take to achieve a range of measures, including those relating to defined ambition schemes and collective benefits.
CDC pensions, which were legislated in June last year, have been widely touted as a potential saviour of more secure income at a time when final salary pensions are in decline.
Under the CDC model, contributions are not retained in an individual fund for each member, but are pooled instead. When a member retires, the income is paid from the asset pool rather than through the selection of an individual retirement income products.
Ministers believe that pooling money in this way will help increase the retirement incomes of some workers up to 30 per cent, compared to individualised defined contribution schemes.
A further attraction of collective benefits is that, compared with an individualised DC pension, they allows members to ‘smooth out’ the ups and downs of market fluctuations and other external shocks.
However, CDC schemes have come under fire recently, with director of corporate affairs at Partnership Jim Boyd, previously stating that these schemes can be viewed as an “inter-generational ‘Ponzi’ scheme” by younger people.
Pensions expert Ros Altmann also previously warned that the outcome of CDC schemes relies on “inter-generational risk-sharing” and reliability of actuarial forecasts.
Tom McPhail, head of pensions research at Hargreaves Lansdown, agreed, adding: “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.”