The government should focus collective defined contribution on smaller employers where charges are typically higher and where there is less access to investment expertise says JLT.
Responding to reports of DWP plans to push ahead with the creation of a regulatory framework to facilitate collective DC, JLT Employee Benefits CEO Mark Wood argued smaller schemes had more to gain from the initiative.
His comments come in response to an interview with pensions minister Steve Webb in the Financial Times where he said that large employers had expressed interest in joining a collective DC scheme with a pooled fund to cut charges and increase the range of investable assets.
Webb said one advantage of collective DC schemes would be the ability to invest over a longer period, enabling access to a more diverse range of assets such as infrastructure and direct investment in property. Webb claims returns could be up to 30 or 40 per cent higher over a lifetime when taking into account lower fees.
He described two potential models for collective DC in the UK. The first would see the industry setting up a scheme within a regulatory framework created by the government. A second alternative would see the government providing some form of underpin to deliver greater certainty.
The DWP says more details on the plans, first outlined in last year’s Reinvigorating Workplace Pensions paper, would be published in the summer.
Webb told the FT: “If you can make it work, you’ve got the chance for significantly better outcomes. You could imagine a DC protection fund or something that pooled some sort of insurance contribution and provided certainty…There could be a role for the private sector.”
Wood says: “With the new economic norm defined by the expectation of low real returns into the medium term, Steve Webb is correct to focus on the cost of running individual pension schemes in seeking to ensure adequate income in retirement. However, the focus on large schemes and the hope placed on the possibility that yield can be consistently improved by allocating a portion of fund assets to high risk categories both require examination.
“To date, only the very largest schemes have been party to deliberations. In general these schemes are well-organised, with good governance and efficient investment processes. They have little to gain by combining with other large funds; the difference in practices and performance would be difficult to detect. A combination of smaller funds with harmonised benefits would, in contrast, bring very considerable cost reductions, thus benefitting members’ prospects. Diversifying this combined fund of small and medium sized schemes then becomes practical. The largest schemes already chase yield by accepting risk on a portion of their monies. Lower down the scale there is neither the access to expertise nor the ability to withstand loss.”