Government pushes for new collective pension plans
Plans for the introduction of Collective Defined Contribution (CDC) schemes are to be announced in the Queen’s Speech. What are they, and why does the Government want them introduced?
'Collective' pension plans are expected to be included in the Queen's Speech this week, as the Government sets out its legislative agenda for the coming year.
Collective Defined Contribution schemes are where pension savings are pooled together by a group of individuals to create one large pension pot, instead of being held in separate accounts.
Full details on how the scheme will work in the UK are yet to be announced, but this type of plan is common in the Netherlands.
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The outline
Employees (and their employers) under the scheme make contributions on a regular basis to a pot, just as they do now. The pension scheme is run by an insurance company, and pays out money to retirees, so that there is no need to buy an annuity upon retiring.
You have a 'target' level of pension, which supporters have claimed is as much as 30% more than you could get with our existing pension schemes. The pool of money is set up in a variety of investments, which shares the risk between investors, and lessens the risk of the pot taking a sudden plunge in value, as a wide spread of investments means that returns are, in theory, more secure.
Why does the Government like the idea?
One plus point is that the administration charges associated with one large pot, rather than a number of individual pots, should be much smaller meaning fees can be kept low.
From the Government's point of view, that will keep a lot of companies happy, with the rest of us benefitting from (in theory) a more secure, and possibly larger, final pension.
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The downsides
As Tom McPhail, Head of Pensions Research at Hargreaves Lansdown points out, the UK already has a form of collectivised pensions in with-profits funds.
He says that investors now shun these investments "because of their complexity, lack of transparency, and poor management”.
There are plenty of other downsides too. The target pension is not guaranteed, so it could still drop in value significantly before you get to retirement.
McPhail argues that any employer who decided to implement a CDC scheme would actually be restricting the new pension freedoms that came with the Budget, which might not be well received by their workforce.
They are also unfair schemes, he says, because “with the best will and skill”, there is no actuary in the world who would be able to fairly distribute money between generations, social groups and individuals. In fact, since well-off people tend to live longer than low-earning workers, CDC schemes will actually benefit the former.
There's also the fact that some Dutch politicians have actually called for collective pensions to be scrapped in order to move towards the British model!
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Do you think CDC schemes are a good idea? Are there other alternatives that would be preferable, or is the current system fine as it is? Let us know in the comments below
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