Pensions Minister backs UK introduction of Dutch-style collective pension schemes

Out-Law News | 29 Jan 2014 | 4:21 pm | 2 min. read

Allowing private sector workers to 'club together' in order to contribute to a collective pension scheme could give them better returns on their individual investments, the Pensions Minister has said.

Speaking to The Times (subscription required), Steve Webb backed calls by some in the pensions industry to introduce collective defined contribution (CDC) pension schemes as part of the Government's forthcoming reforms to workplace pensions. This type of pension, in which individual pension contributions are pooled to form a single 'mega-fund' for investment purposes, is not currently permitted in the UK but has been popular in other European countries including Denmark and the Netherlands.

"Some of the best pension schemes in the world are run on a collective basis," Webb told the newspaper. "I would like to see British workers have access to schemes run on this basis."

"Many pensioners have been getting a very poor return on their savings in recent years. This scheme will give them a guaranteed, index-linked return and will be particularly attractive for women pensioners who will draw the higher pension for longer," he said.

In a collective pension, employers and employees pay a fixed contribution but the pension risk is shared between members of the scheme. They have been particularly successful in the Netherlands, where such schemes pay benefits to members directly from the collective fund in proportion to that person's contributions rather than requiring the member to convert his or her individual contributions into an annuity.

By contrast, in a traditional DC scheme the final value of the pension fund a member receives depends on the performance of that member's individual contributions, meaning that it is that employee who bears the full risk of the pension losing value. The vast majority of the nine million people that the Government expects to begin saving more towards their retirement or saving for the first time under its automatic enrolment programme, which began for the largest employers in October last year, will be enrolled into DC schemes. On retirement, DC savers will generally purchase an annuity from an insurance company that will convert the pension fund, or part of the pension fund, into a regular pension income.

CDC schemes were one of a number of proposals set out in a Government consultation paper on the future of workplace pensions, published in November. They would be classed as 'defined ambition' (DA) schemes for the purposes of governance, disclosure and funding requirements set by the pensions legislation and related regulation.

This type of pension has been backed by think tank the Institute for Public Policy Research (IPPR), which published a report last year showing that CDC schemes could provide pensioners with a retirement income around a third higher than that under a traditional DC pension. However opponents, including the Association of British Insurers (ABI), claim that the schemes are complex and less transparent than traditional DC, and transfer the majority of the risks to younger members.

Pensions expert Matthew de Ferrars of Pinsent Masons, the law firm behind Out-Law.com, said that although it was true that CDC schemes had their disadvantages, "no form of pension provision" was without drawbacks.

"The proposed CDC system suggested by the Government is one of several options which would be made available to employers, in addition to existing options such as defined benefit and simple DC schemes," he said. "If this was taken forward, employers would be enabled - not required - to provide CDC plans, but if employers and employees think the disadvantages outweigh the advantages given their circumstances they simply will not use them."

"CDC has advantages not available in other systems, not least of which is a probable improvement in returns and retirement benefits for the same contributions when compared with straight DC, as has been pointed out by several recent studies. These schemes are being seriously considered as a better value option by many major UK employers, and could result in much improved pensions for millions of people," he said.