News that legislation to facilitate collective defined contribution schemes is to be included in tomorrow’s Queen’s speech has exposed stark differences of opinion amongst pensions professionals on the structure.
Hargreaves Lansdown has accused actuaries of backing the idea because it will mean more work for them, while several intermediaries have expressed reservations over the tension between the Treasury’s freedom and choice policy initiative and CDC, which requires individuals to stay invested in a scheme for a very long time.
CDC has also been attacked as being unfair on those with shorter life expectancy, and questions have been raised as to whether there is any employer demand for such a solution.
Deloitte published figures showing 55 out of 415 Dutch CDC funds had reduced pensions in payment in 2013.
But critics of CDC agree the structure could achieve Government aims of bigger pensions through lower charges and longer periods of equity investment.
Hargreaves Lansdown head of corporate research Laith Khalaf says: ““CDC schemes would keep more actuaries in jobs, perhaps why most are so in favour of their introduction.
“CDC is a damp squib. Employers are busy dealing with the huge reforms the government has recently made to the pensions system. A CDC scheme will be complicated to explain and won’t give workers the freedom at retirement other schemes enjoy; employers are therefore likely to give CDC a stony reception.
“With the best will and skill in the world actuaries won’t be able to distribute money fairly between generations, between social groups, and between individuals. In particular CDC schemes will benefit the affluent, who tend to live longer than low earning workers. By contrast, the individual pension accounts we currently have in the UK allow individuals to buy enhanced annuities if they are in ill health, or have a lower life expectancy.”
Buck Consultants head of pensions policy Kevin LeGrand says: “Since one of the prerequisites for the success of the CDC model is that the member funds are held for as long as possible by the scheme and invested on a collective basis, there is a tension between CDC and the Treasury’s Budget proposals to allow members unfettered access to their funds in retirement. At the moment we do not know how members will react to the freedom, so it may be that large numbers of them will be happy to leave their funds within the scheme and draw down as and when they are needed. However, if they succumb to the temptation of ‘cash now’, that could undermine the effectiveness of a CDC scheme.
“CDC requires scale to deliver the benefits claimed for it. For CDC to be used effectively in the UK there will need to be a sea change in approach, since traditionally our schemes have been employer-based, rather than covering an industry or other large grouping.
“In our previous responses to the government, we have broadly supported CDC as an option – but not to make it compulsory. We continue to caution against the assumption that a ‘good outcome’ for members is based solely on the number of pounds paid, without reference to the restrictions around the benefits. A good workplace pension scheme is one that helps the employer to deliver a good outcome to members, not only in terms of size of benefit, but that also integrates with other benefits and the employment terms.
“We hope that these peripheral benefits will not be lost in a legislative stampede for lowest common denominator pensions”.
Barnett Waddingham partner Danny Wilding says: “I would certainly welcome any plans which would allow CDC to become a reality in the UK. If the Budget’s proposed relaxation of rules for people retiring from defined contribution schemes goes ahead next year, there will be a real need to introduce new types of scheme which can take full advantage of the new rules. For many people defined contribution schemes will now operate purely as a retirement savings account, whilst the likelihood of employers opening new defined benefit schemes is slim. CDC offers a viable alternative to employers who wish to help support their staff in retirement, and strikes more of a balance between employee and employer responsibility for pension arrangements.”
Broadstone Corporate Benefits technical director David Brooks says: “Which employer wants to explain to their employees that they are entering into an arrangement that removes all the new flexibilities that have been trumpeted by the press and have just come into force for an ‘aspiration’ they will be better off in retirement. Given this and that most private sector employers are still bedding down auto enrolment we cannot see much appetite amongst employers to rewrite their pension schemes.”
Chase de Vere auto enrolment specialist Sean McSweeney says: “These proposals seem inconsistent with the Budget announcements aimed at providing greater control and flexibility to pension savers.
“We also have severe concerns that the constant flux in pensions policy could undermine the pensions industry from investing in new propositions and stop individuals becoming more engaged with their pensions
“Although we believe some aspects of ‘Dutch style’ arrangements could be part of the future mix, it won’t be right for many employers and employees to simply pick up the Dutch model and move it to the UK; the Dutch model is not a panacea.”