Defined Benefit 

MPs warned collective pensions won't right DB wrongs

MPs warned collective pensions won't right DB wrongs

Introducing the concept of collective defined contribution (CDC) schemes in the UK will not solve the problem of defined benefit (DB) pension funds being underfunded or high deficits, specialists have warned.

In their submissions to the Work and Pensions select committee inquiry on CDC, announced at the end of November, several pension experts have warned the government should not allow the new scheme concept to be used by employers to avoid their funding obligations regarding final salary plans.

CDC schemes are also known as a form of "defined ambition" scheme and differ from DB schemes, since they do not guarantee certain incomes in retirement.

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

These schemes also differ from the traditional defined contribution (DC) plans, since 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.

The Pension Schemes Act 2015 created by the 2010 to 2015 coalition government defined "shared risk/defined ambition" or CDC 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.

Unite, an industry-wide trade union with 1.4 million members, said that "the notion that current DB schemes can or should be converted to a CDC format is neither acceptable in principle or realistic in practice".

The union's submission stated: "The idea is a red herring promoted with a view not to benefit scheme members but rather to allow employers to escape from their legal obligations to fund DB schemes.

"CDC should be of interest and be promoted solely as a way of providing better outcomes for members in respect of their pension for future company service and not as a means to reduce benefits for past service."

The only exception to this is "where members agree to a transition of benefits, under which they specifically give consent to a change in the form of their past service benefits," the union added.

The creation of a CDC scheme is being pushed as a solution to solve the pension dispute at Royal Mail, which is closing it DB fund, the Royal Mail Pension Plan.

Michael Otsuka, professor at the London School of Economics department of Philosophy, Logic & Scientific Method, and pensions representative at the University and College Union (UCU), is also supportive of a similar solution for the Universities Superannuation Scheme (USS), the biggest private DB scheme in the country, which is currently the target of negotiations regarding its closure.

Unite stated: "While some employers who currently have DB schemes might be interested in adopting CDC as an alternative to moving to DC, this should not and need not mean that a closed DB scheme should be linked to the CDC."