Defined Contribution  

MPs warned defined ambition won't work with pension freedoms

MPs warned defined ambition won't work with pension freedoms

Collective defined contribution (CDC) scheme might not be fit for pension freedoms, Hargreaves Lansdown has warned.

Nathan Long, senior pensions analyst at the company, told the Work & Pensions select committee today (21 February) at a hearing in Parliament that freedom and choice hasn't "been modeled in the work that has been done already" in this field.

Collective defined contribution schemes differ from defined benefit (DB) pensions in the sense they do not guarantee certain incomes in retirement.

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Instead, collective defined contribution schemes have a target 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.

Instead they invest savings in a larger collective pot, which provides an income to individuals during their retirement.

The Pension Schemes Act 2015 created by the coalition government defined collective defined contribution as a distinct pension category, but secondary legislation to bring them into effect was never introduced.

The committee launched an inquiry on these type of schemes in November, since they have the "potential to address some of the concerns that policy makers and the public have about the current pension offer".

Mr Long said: "Retirement is very personal and people need to make choices that suit their circumstances. Looking at this from a collective defined contribution lens, you need to offer that flexibility, the ability to take lump-sums and to transfer out.

"And if it offers that, the problem will be that people that will transfer out will be those with larger benefit provisions built up, and will also be people who don't expect to live as long on average.

"If those people take their money out, all of the sudden you have this shared pooling of risk in retirement weakened."

After the introduction of pension freedoms in the UK in 2015, the volume of DB pension transfers has soared, as savers seek to take advantage of sky-high transfer values and to move their nest eggs into defined contribution schemes to access their cash.

HM Revenue & Customs data showed more than £14bn has been unlocked from defined contribution pensions since pension freedoms came into effect.

According to Hymans Robertson, around one million individuals will transfer out of their DB pension schemes in the next 25 years.

Hilary Salt, senior actuary at First Actuarial, also present at the hearing, argued there is no technical reason why a CDC member shouldn't be allowed to transfer out.

She said: "In DB scheme transfers, you generally look at the benefits you expect in the future, and then you discount them to now, to work out the transfer value.

"With a CDC arrangement, each person would have a share of the fund, which would be their property right, and they would be entitled at any point to transfer out, even right up to retirement.