UK - The UK government has been criticised by pensions industry bodies and trade unions for "closing off" the possible introduction of collective defined contribution (CDC) pension schemes in the UK.

In its response to the consultation on Collective Defined Contribution Schemes: an assessment of whether and how CDC might operate in the UK, the Department of Work and Pensions (DWP) noted while research supported claims of enhanced performance on average and some increased predictability of outcomes, there were other concerns.

The report argued "there is significant doubt on the ability of such a scheme to manage risk successfully in a way which is fair to different generations of scheme members, and doubt remains on the extent to which the stability of CDC schemes is dependent on a continuing stream of member contributions".

In addition, the DWP claimed there were legal complications of operating CDC schemes in the UK "given existing European legislation", and argued demand from employers is likely to be limited. So the DWP added it had "concluded that the government should take no further action on CDC schemes". 

However, Nigel Peaple, director of policy at the National Association of Pension Funds (NAPF), said: "Given the rate of closure of defined benefit (DB) schemes over the last 12 months - and the likelihood that this trend will continue - it is disappointing to see the government closing off one of the options that could have helped to preserve some of the features of DB pension provision."

Meanwhile, a second report commissioned and published by the DWP on Employer attitudes to collective defined contribution pension schemes concluded that while the CDC concept "had its appeal", most employers would be unlikely to switch from their existing scheme to a CDC.

It noted the only things likely to drive a move to CDCs would be if competitors adopted it and employees expected it as part of their employment, or if "the running costs and trustees' liabilities were commensurate with its ability to deliver longer term-stability and greater financial return".

The report's definition of CDC schemes, which are used in the Netherlands, is they are essentially a trust-based DC scheme to an employer, however the contributions would be paid into a collective fund instead of into individual savings accounts. In addition, the liabilities would always be equal to the scheme's assets as it is the trustees' decision to change the level of indexation or revalue members' pensions, and members would have no control over fund choice for their investments.

Findings from the commissioned report, conducted by the British Market Research Bureau (BMRB) as part of the DWP's consultation on risk-sharing in pensions, suggested CDCs were seen to offer no greater security than a DC scheme. This was because pensions would not be guaranteed "and employers thought that they were unlikely to provide a level of pension comparable to a DB scheme".

The interviews with 45 employers also revealed that compared to a contract-based DC scheme respondents were concerned about the extra costs of a trustee board and professional advisers, "which could be substantial", according to the report. There was also a perception amongst employers with a trust-based DC scheme that the level of responsibility and potential liability on CDC trustees "might be greater as their decisions would have a direct effect on members' pensions". 

But Peaple warned the decline of DB "makes it all the more important that the government presses ahead with other policies to promote risk-sharing in both DC and DB. The worst possible outcome would be for the DWP's ‘Deregulatory Review' to dismiss all the options one by one until we end up back where we started."

Kay Carberry, assistant general secretary of the Trades Unions Congress (TUC), argued that DC schemes "often have poor contributions, high charges, are over-invested in equities, and lack both governance and member involvement."

She argued that this is why there is a growing interest in collective DC approaches as they "could offer more to members than DC schemes based on individual accounts".

"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% member-nominated - and employers paying adequate contributions, will be vital in a CDC approach." added Carberry.

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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