Brushing the dust off Collective pensions: TUC Pensions Conference
The subject of Collective Defined Contribution (CDC) pensions got an unexpected airing at the TUC Pensions Conference last week.
The topic was not even on the conference agenda. For, after losing its most high profile backer in former Pensions Minister Steve Webb with the end of the Coalition Government, official policy work on the issue has dried up.
Rather, the subject was brought on several occasions by delegates in question and answer sessions from the conference floor.
And, on reflection, it is not hard to understand why. For collective DC (sometimes known by a vaguely more approachable term Target Pensions) potentially helps to overcome a number of the unsolved challenges we have got when trying to develop an adequate pensions system.
The future of defined benefit pensions up for discussion, with the looming publication of a Green Paper on the issue. But the inadequacies of the sole alternative in defined contribution are increasingly evident with savers often parked in inefficient individual accounts that are inadequately governed and bestowed with insufficient contributions. Hence the potential appeal of something that can deliver the efficiencies of pooled, collective provision to members without leaving employers on the hook for employees who may have left decades before.
Secondly, CDC could help clear up the mess left by so-called pensions freedom that will leave many DC savers with retirement choices limited to cashing in or using expensive drawdown products. By utilising mortality risk pooling and allowing assets to remain invested, CDC has the potential to offer an income for life, keeping pace with prices for a lower cost than the annuities traditionally offered by insurance companies.
For CDC is in part like a DB pension: savings are paid into a pool, with all pensions paid from the same pool. But, akin to DC, there is not the hard promise of a certain income at the end and there is no employer guarantee behind it. Notably, pensions are likely to provide better returns than DC pensions. Indeed it could offer 30 per cent more, modelling suggests.
CDC schemes could reap the benefits of economies of scale from their size, including the ability to invest in assets that are too hard to buy and sell quickly for individual savers to purchase; and without forcing savers to adopt what are potentially excessively risk-averse strategies in retirement by locking in returns from low-returning government debt via an annuity purchase.
Collective pensiosn are somsetimes treated as some foreign invasive species by the more excitable corners of the pensiosn commentariat (yes, some people do get excited by pensions). And indeed, they have a proven track record in countries including Denmark, the Netherlands, and parts of North America.
There are more serious concerns that some generations of savers could benefit at the expense of others (hence the need for robust governance and a not-for-profit structure); some worry that savers will struggle to understand why pensions might have to fall in extremely bad years (though this is not likely to be to the extent of the individual relying on drawdown); and they definitely don’t deal with the long-running problem of inadequate contributions being made in the first place.
CDC had its moment of prominence under the tenure of Steve Webb as Pensions Minister from 2010-15. He paved the way with Pension Schemes Act.But the necessary regulations were never completed. And the whole process was frozen by Webb’s successor Baroness Altmann.
Questioned on CDC at TUC Pensions Conference, Richard Harrington, the current Pensions Minister, said it wasn’t an idea he had considered but he is open to representations. So now is the time for CDC’s wide band of supporters to act. A pressing need to deal with pensions adequacy coupled with a Pensions Minister with an open mind could help to take CDC off the dusty shelves at the Department for Work and Pensions and put to work delivering for savers.