The inclusion of pension minister Steve Webb’s flagship collective DC in today’s Queen’s Speech has received a cool welcome from across the pensions industry, with the majority of pension consultancies and providers predicting minimal if any uptake from employers.
Providers with parents in the two countries cited as having successful CDC arrangements, Netherlands-based Aegon and Now: Pensions, a subsidiary of Denmark’s ATP, have both poured cold water on the government’s claims that new collective models can work in the UK.
Aegon says UK retirees’ expectation that they can choose to retire when they want, made more acute by the recent Budget relaxation around drawing benefits, do not sit well within the Dutch system which requires individuals to receive benefits at a fixed date.
Now: Pensions says huge differences in cultural attitude to collectivism, trade union membership levels and compulsion in contributions mean a solution that works in Denmark will not necessarily work in the UK.
The TUC supports the idea of CDC but says it runs against the grain of the government’s other big pensions policy, that of freedom and choice for over-55s to spend their pension as they want.
EBCs and corporate IFAs remain divided on the chances of success of CDC, also known as defined ambition, although a majority argue it will not succeed, with some adding that the pensions industry is already stretched to breaking point and could become overwhelmed with another raft of regulatory reform.
The Association of Consulting Actuaries says the decision not to permit employers to offer flexible defined benefit-type schemes is likely to restrict the take up of the reforms meaning the closure of defined benefit schemes in the private sector will continue.
Morten Nilsson, CEO of NOW: Pensions said: “Whilst innovations such as collective DC schemes have been successful in Denmark and the Netherlands, both of these markets are highly unionised and have had mandatory or quasi mandatory pension saving for many years.
“The populations are relatively homogenous and the collective DC schemes operate on an occupational basis with people from similar professions sharing risk with one another – a much fairer approach than manual workers sharing risk with white collar workers.
“The UK is a much more fragmented market and while changing legislation to allow these schemes could have merit, in many ways it feels as though we are running before we can walk.
”Like it or not, UK companies have limited appetite for pension liabilities and consumers have limited interest in locking themselves up in risk sharing arrangements. As the market grows and matures, this position might alter but I think we have some distance to travel.”
Aegon UK regulatory strategy manager Kate Smith says: “The 2014 Budget has given individuals more flexibility about how they take their pension – whether as an income or lump sum once they reach age 55. Under the Dutch CDC model there are no such flexibilities. People can only receive their pension at the time and in the format set out in the scheme rules leaving them little room for manoeuvre. Getting the UK ready for retirement needs simple, reassuring and digital solutions, not more complexity.
“The scheme does have its merits. The collective buying power would offer benefits through economies of scale and could provide higher investment returns than personal pensions, but the move doesn’t reflect trends in UK society. The Aegon Global Retirement Readiness Report 2014 revealed that only one in three UK workers currently expect to have a fixed retirement date, so the constraints of a CDC scheme would severely damage the retirement plans of the remaining 71 per cent.”
“The new legislation will allow employers and providers to set up CDCs from 2016, but it’s unlikely the industry will be so fleet of foot as they continue to focus on delivering choice and new ways for customers to engage in saving for retirement. Only the very largest employers, those who continue to run defined benefit schemes, are likely to be interested.”
ACA Honorary Secretary, Bob Scott says: “Experiences from abroad suggest CDC schemes can offer the opportunity to achieve better investment returns because of pooling and lower administrative costs, but as with other defined contribution products they do place pension risks with members alone, so they may not appeal to employers wishing to provide some greater guarantee. However, some large firms will see CDC as an advance on traditional defined contribution schemes and over time we envisage there will also be industry-wide and multi-employer scheme interest from smaller employers. “
JLT Employee Benefits chief executive Mark Wood says: “Defined ambition is a difficult concept. While investment returns and life expectancy conform with expectations, the system brings some benefit. Outside these norms, as we have seen in Holland, the system breaks down. Defined benefit pensions depend on the corporate sponsor’s covenant but for the majority have proved reliable. Annuities protect the individual from investment risk and living longer than expected. Defined ambition gives no such guarantee.”
Duncan Buchanan, the newly elected President of the Society of Pension Consultants says: “The new freedom for members of DC schemes to access their retirement savings in lump sum rather than pension form as announced in George Osborne’s recent Budget means that existing DC schemes have become far more attractive to pension savers. It is, therefore, unlikely that employers will feel pressure from employees to establish or contribute to new style “risk sharing” defined ambition schemes. Dutch style Collective Defined Contribution schemes which will be introduced to the UK require a critical mass of investments to make the risk sharing between younger and older members work fairly and without large numbers of members these collective schemes might not be able to get off the ground.”
Barnett Waddingham partner Danny Wilding says: “CDC may not be right for everybody but it cannot be a bad thing that the government is preparing the legislative foundations for it to at least become an option for pension provision.”