Collective DC no silver bullet – PMI survey

Collective DC risks being misunderstood and is not a solution to the problem of stressed DB schemes, but its introduction could improve standards of workplace pension provision, a survey of Pensions Management Institute members has found.

In a poll of 99 UK pension consultants, trustees, administrators, actuarial, legal and investment professionals, 52 per cent believe employers would like to see the introduction of CDC and 53 per cent think its introduction would raise standards.

But 57 per cent said that allowing underfunded DB schemes to be converted to CDC arrangements would potentially be detrimental for members of those schemes, with regulation and maintaining funding being the main issues.

The survey was launched in response to the publication of the Work & Pensions Commons Select Committee’s inquiry into ‘defined ambition’ pension schemes.

Asked what advantages CDC schemes would offer, 43 per cent of respondents said that it would free members from having to making investment decisions, 36 per cent said that it would lead to higher pensioner incomes and 31 per cent said that it would mean members would be largely unaffected by costs and charges.

But almost two-thirds of those polled – 65 per cent – saw a lack of understanding as the highest concern over the introduction of CDCs, with 53 per cent concerned schemes would be vulnerable to funding problems in the manner of DB schemes and 49 per cent concerned that benefits are not guaranteed. Intergenerational cross-subsidies was also seen as a disadvantage by 47 per cent of those polled, with respondents concerned that the contributions of younger members could be used to provide benefits for retirees rather than secure deferred benefits for younger members.

Asked how CDC schemes might be established in the UK to achieve effective economies of scale, 59 per cent thought creating industry-wide or regionally-based schemes would be the most viable option, with 50 per cent suggesting Nest could be converted to a CDC arrangement.

PMI president Robert Branagh says: “Our results show that while there is an appetite for CDC in the UK, it is not seen as a panacea for stressed DB schemes. Ultimately, whether CDC-style arrangements could work would be a question of political will. Supporters focus on the success of the model in other countries and argue that the system combines the more desirable characteristics of traditional DB and DC arrangements. Opponents are concerned about aspects of inter-generational risk sharing in particular.

“The Government must take care in assessing the evidence and distinguish properly between genuinely informed comment and simple vested commercial interest. In the context of the wider pension scheme sustainability and development debate, it is certainly one that has provoked a certain amount of animated discussion and will no doubt continue to do so this year.”

Ralph Frank, co-head of Cardano’s DC business says: “Our experience of the Netherlands shows there are three major pitfalls to CDC. Members often think it’s like a DB scheme, where income is guaranteed, but this is not the case. The schemes are complex and more expensive to run than traditional DC and, if anything, are likely to result in less assets being available to members as a result. Setting income levels equitably can also be very challenging. We would strongly caution against ‘going Dutch’.

“We are supportive of finding effective ways to provide index-linked pensions for life. The first step in this process is to benchmark success against the index-linked pension being built-up rather than a pot of assets. There are relevant lessons to be learned from applying techniques used successfully in DB in the UK over the past decade”.