DWP blames EU legislation as it ends DC risk-sharing consultation

THE DEPARTMENT for Work and Pensions says fear of breaching European legislation and the risk of creating unfairness between generations has led it to discontinue its DC risk-sharing consultation.

The Department accepted that modelling suggested that collective defined contribution schemes could provide better and more predictable outcomes for individuals, it was concerned at a risk of unacceptable intergenerational unfairness and of breaching European legislation.

Collective defined contribution schemes had been proposed as a potential way to bring together some of the most desirable characteristics of both defined benefit and defined contribution schemes. Under collective defined contribution schemes the employer is intended to be free of all risk, providing no guarantees towards any level of pension, with certainty about the level of contributions. Contributions are paid into a collective fund instead of individual savings, thus allowing investment risk to be shared amongst individuals.

A DWP spokesperson says: “We must ensure that members of pension schemes have appropriate protection. Although we found that the drawbacks of collective defined contribution schemes were too great, companies are already using a wide variety of existing risk sharing options. Our rolling deregulatory review has aimed at both reducing burdens and introducing simplification measures, targeted specifically at reducing the cost of provision of pension schemes for the sponsoring employer.

“We continue to be interested in finding flexibilities that could be added whilst balancing this with the aim of maintaining good quality pension provision and protection for members. A priority has to be that such new ideas must work for both employers and members.

“We hope to gain new insights from a DWP-sponsored research conference in Exeter in January 2010 which will consider risk mitigation in defined contribution schemes.”

TUC Assistant General Secretary Kay Carberry says: “The employer retreat from defined benefit pensions means that many more people are now saving in DC pensions. Yet these often have poor contributions, high charges, are overinvested in equities, and lack both governance and member involvement. Individual savers face big risks as they bear all the costs of the volatility of both investments and annuity rates. This is why there is a growing interest in collective approaches to DC pensions – which could offer more to members than DC schemes based on individual accounts – from all sides of the pension debate.

“While we may not be able to simply transfer the Dutch model to the UK, we do need to explore a collective approach that works in the UK.”