Should Nest adopt a collective DC model?
Hamish Wilson, managing director, Hamish Wilson
Possibly. As we all know, UK Plc regards DC as the future and the challenge is to make it more efficient and the benefits emerging more predicable.
The secret is to pool resources. Nest presents an ideal opportunity to do this. Pooling resources means risk is shared between members. It also means not discriminating between members and instead giving the same indexation (akin to investment return in traditional DC) to all. But in the DC world this can only be achieved if we accept no guarantees. Why? As in DC something must give benefits.
Collective DC is DC whilst at the same time achieving much of the efficiencies of DB through collectivisation.
Estimates suggest members receive some 40 per cent more benefits over a full career through the power of collectivisation compared to what one might call ’raw DC’ and with much less volatility. The power of pooling enables reduced costs, both administration and investment management, greater exposure to growth assets and for longer and removes the need for insurance so there is no need to buy-out benefits on retirement.
John Lawson, head of pension policy, Standard Life
No. Supporters of collective DC come out with all these figures about how UK pensions have AMCs of 1.5 per cent, and you could get 50 per cent more if we had more collectivism.
But the numbers are not based on reality. And look at Holland, which is always held up as the example of how collective DC can work. They have seen 6 per cent cuts in pensions this year.
We already have the benefits of collectivism of administration in the UK system. We at Standard Life have got tens of thousands of employers with hundreds of thousands of scheme members benefiting from the scale of operating off a single admin platform.
What we do not have is collective funds. Collective DC is essentially with-profits, and their appeal depends on your view of the UK’s appetite for with-profits. The problem for setting up a new with-profits fund is the appetite of a provider to put up the capital at the outset so you can smooth the fund. If you start from scratch you will have to claw back some returns from those members who go in first, and who will want to pay into that?
Mark Fawcett, chief investment officer, Nest
Collective DC has merits, such as sharing investment risk, but it requires careful consideration outside a compulsory savings enviroment. Furthermore under current UK legislation, CDC schemes are not classified as defined contribution schemes.
An extensive investment consultation involving more than 100 stakeholders led to the evidence-based recommendations that were made to our trustee members on designing Nest’s investment approach, and these fed into the investment strategy we have today.
We believe this strategy delivers an approach to risk management that’s appropriate for our members.
Based on our understanding of the diverse needs of our target group, we have aimed to develop an approach to investment that offers a well constructed default strategy the Nest Retirement Date Funds with clear return objectives and a carefully managed risk profile, plus a selection of fund choices for those who want a different level of risk or an approach which matches their beliefs or faith.