‘Going Dutch’ on Pensions
You have to admire Steve Webb’s tenacity and commitment to the job. Whereas with the previous government it was a case of yet another change in the pension minister, Steve’s tenure may be best summed up with the term “pension change minister”. The latest incarnation of this is collective defined contribution (CDC) as announced in the Queen’s Speech.
There is no doubt that transformational change was needed with respect to pensions, as ably evidenced by the significant drop in the number of individuals funding pensions over the last twenty years or so, and what appears to be an almost total lack of engagement from the general populous. We have now had the successful introduction of auto-enrolment, the single state pension from 2016, and the proposed freedom and flexibility for defined contribution schemes from April 2015. Is CDC the final piece of the jigsaw and the panacea that will see everyone re-engage in their retirement wealth planning?
The on-going demise of company defined benefit schemes (DB) has seen the pension risk shift from the employer to the individual as more and more people become members of defined contribution schemes (DC). The pension-income certainty of a DB scheme is replaced by the certainty of only knowing what your fund is worth on your actual retirement date from a DC scheme, and the hope that you may be able to maintain your income into retirement. CDC has been advocated as something of a half-way house, in that it supposedly reduces the risk to the individual, while offering the possibility of an income as much as 30% higher than that of a traditional DC scheme.
The Dutch have been running CDC for a number of years and have generally been very successful at it. In the Netherlands the schemes can be broken down either by industry wide funds (e.g. retail sector, hospitality sector etc.), single company or corporations funds or independent professional funds, such as for medics. The economies of scale, and cost efficient management, are presumed to be some of the reasoning behind the suggested 30% uplift in benefits touted by UK politicians. As the members’ pensions are paid from the fund, and not from an annuity (which will go down well with the respondents to the recent IPPR study, they do not individually have to de-risk or disinvest as they approach retirement, which in principle allows the trustees to take a long-term investment view, and in theory reduces the risk to the individual. Infrastructure projects therefore become more appealing.
However, the Dutch experience is not all positive. In 2013, 55 out of 415 CDC schemes reduced their pensions in payment. In addition there is some concern of inter-generational subsidy, i.e., the younger generation subsidising the current pensioner’s lifestyle that they themselves are unlikely to enjoy when they come to retirement as an unsustainable level of benefit is currently being paid.
Any action that re-engages people with their retirement wealth planning has to be applauded, though as with much of pension legislation the devil will be in the detail.