MPs to probe pushing collective pension schemes

This type of retirement savings plan has the “potential to address some of the concerns that policy makers and the public have about the current pension offer", the committee said.

They are not yet allowed in Britain but have been widely used in the Netherlands, Canada and Denmark.

The Pension Schemes Act 2015 created by the 2010 to 2015 coalition government defined "shared risk/defined ambition" or collective defined contribution as a distinct pension category.

However, regulations under the act to bring them into effect have not yet been introduced.

In October 2015, the government announced the plans would be shelved indefinitely so as not to distract from other major reforms such as auto-enrolment and pension freedoms.

The schemes are also known as a form of "defined ambition" scheme and differ from defined benefit (DB) schemes in that they do not guarantee certain incomes in retirement.

Instead, collective defined contribution schemes have a target or "ambition" amount they will pay out, based on a long term, mixed risk investment plan.

They also have the scope to redefine the benefits they offer if circumstances - like adverse economic conditions - require, the pensions committee stated.

Collective defined contribution schemes differ from the traditional defined contribution (DC) schemes in that they do not produce individual pension pots, they invest savings in larger collective pots instead, which then provide an income to individuals during their retirement.

According to the committee collective schemes take “the big central decision of pension freedoms out of retirement planning, and also much of the risk”.  

Collective defined contribution schemes are also considered a potential source of investment for projects including infrastructure, as alluded to by chancellor Philip Hammond in this week’s Autumn Budget, when he said he wanted to "unlock" investment from pension funds.

The pensions committee wants to figure out the role 'defined ambition' collective defined contribution schemes could play in the pension landscape, the potential benefits to savers and the wider economy, and the legislative and regulatory framework that would be required to make it work.

The probe forms part of its ongoing inquiry into pension freedoms, which, it said, “has highlighted the general level of mistrust and disengagement with pension plans”.

Advocates of collective defined contribution schemes have told the committee the vehicles provide greater assurance of retirement income and more efficient pooling of costs and risks among members than traditional DC, while not imposing pension promises on employers.

Studies by RSA and Aon Hewitt estimate that collective defined contribution schemes could have delivered 33 per cent better pension outcomes than traditional defined contribution plans over the past half-century, the committee stated.

On the other hand, detractors have told MPs that collective defined contribution schemes may further fragment the pension landscape, suffer from lack of demand and run counter to the trend towards greater individual freedom and choice in pensions.

The Department for Work & Pensions itself said in 2009 that collective defined contribution schemes were too complicated, trustees could not manage the funds effectively and employers were concerned about potential financial liability on trustees.

The pensions committee is inviting submissions before 8 January 2018.

The specific questions it wants answered are:

Benefits to savers and the wider economy:

• Would collective defined contribution deliver tangible benefits to savers compared with other models?
• How would a continental-style collective approach work alongside individual freedom and choice?
• Does this risk creating extra complexity and confusion? Would savers understand and trust the income ‘ambition’ offered by collective defined contribution?

Converting defined benefit schemes to collective defined contribution:

• Could seriously underfunded defined benefit pension schemes be resolved by changing their pension contract to collective defined contribution, along Dutch lines?
• How would this be regulated and how would the loss of defined benefit pension promises to scheme members be addressed?

Regulation, governance and industry issues:

• How would collective defined contributions be regulated?
• Is there appetite among employers and the UK pension industry to deliver collective defined contribution?
• Would collective defined contribution funds have a clearer view towards investing for the long term?

Cleona Lira, IFA at 2 Plan Wealth Management, said: "While I am a big fan of individual choice in determining one’s fund choices including ethical choices and quite sceptical of with-profit like features, I can also appreciate the potential benefits of collective investing. 

"In my experience, employees aren’t as engaged with pensions as they could be, a well-thought out default option would be a positive. 

"Provided it is transparent and the trustees do a great job, it could work – it boils down to execution and I hope there is some way to respect the sense of autonomy for the employees, through great communication, for employees who may not feel some choice in being ‘offered’ just this one option."

Carl Melvin, Certified and Chartered financial planner at Affluent Financial Planning, said he was in favour of the idea of the schemes but warned implementation could be tricky.

He said: "Getting the structure right, achieving the economies sought and getting buy in from the membership and other stakeholders may be challenging unless the benefits can be articulated clearly.

"Collective defined contribution schemes will add to the other scheme types we currently have and potentially add to the confusion the public feels over the perceived complexity that already exists. The key will be communication and to ensure simplicity is maintained."

Appleton Gerrard financial planner Kusal Ariyawansa was more sceptical, however.

He said: "What people want is certainty or control. Something in between is neither here nor there.

"Yes, the returns could be higher but that is subject to many variables out of control of the investor. With low cost lifestyle options I struggle to see how this will ease complexity given the new rules around pension freedoms."

carmen.reichman@ft.com