Collective DC pensions – new DWP papers
The DWP has today published three documents looking at the potential of collective DC pensions.
For those not up to speed with pensions jargon, DC pensions are those where the employer and/or employee make a defined contribution each month. The size of your eventual pension will depend on not just how much you save, but how well your investments perform and annuity rates when you turn your pension pot into a regular pension income.
In other words the individual saver bears all the risk, unlike salary related defined benefit pensions where the employer bears all the risk.
The idea behind collective DC is that while the risk is still all borne by employees they share that risk in some way. This not only smooths investment volatility, but can also produce a bigger pension as costs may be lower and the individual saver may be no longer have to give up so much return to reduce risk as they come up to retirement.
We’ve not had time to analyse the documents in detail – and I expect that we will return to this in future as it’s potentially a very interesting area. But the TUC’s Kay Carberry had this to say today:
The employer retreat from defined benefit pensions means that many more people are now saving in DC pensions. Yet these often have poor contributions, high charges, are over-invested in equities, and lack both governance and member involvement.
Individual savers face big risks as they bear all the costs of the volatility of both investments and annuity rates. This is why there is a growing interest in collective approaches to DC pensions – which could offer more to members than DC schemes based on individual accounts – from all sides of the pension debate.
While we may not be able to simply transfer the Dutch model to the UK, we do need to explore a collective approach that works in the UK.
The role of trustees, which the TUC believes should be at least 50 per centember-nominated, and employers paying adequate contributions will be vital in a collective DC approach.”