Get in touch about Collective Defined Contribution schemes, Can they work here? Do the Denmark and the Netherlands lead the way?
We are now in week four of the DA consultation, with only two weeks remaining. Feel free to comment and let us know your ideas informally either here on the blog or by sending formal responses via an email to the DA email address:
definedambition.pensionsconsultation@dwp.gsi.gov.uk
This week we wanted to focus on collective defined contribution schemes, details of which can be found in chapter five in the consultation document (link below). https://www.gov.uk/government/consultations/reshaping-workplace-pensions-for-future-generations
What is Collective Defined Contribution, what would it mean for individuals and employers?
For individuals - We have spent time researching CDC schemes and how they might work here in the UK. In these schemes, rather than assets being retained in an individual pot for each member (as with traditional DC schemes), assets are pooled together amongst all members in the scheme. Members build up benefit on a targeted basis and then pensions are paid out of the scheme, there would then be no need to purchase an annuity upon retirement.
Pensions can go up as well as down, but evidence shows that final pension outcomes are more stable in a CDC scheme than in an individual DC scheme. This increased stability comes from the fact that members can share risks amongst themselves, rather than one member bearing it all, (as in DC). The bigger the membership, the greater the scope for risk-sharing.
For employers – CDC schemes look exactly like DC schemes because they pay a fixed contribution and there is no liability – but the real benefit is that employers can provide their employees with greater stability than DC at no additional cost.
Let us have your thoughts about CDC; could it work here?
What ideas might you have that could support this here in the UK?
Are Denmark and Netherlands leading the way?
Thanks,
DA Team, DWP
2 comments
Comment by David Hardern posted on
The model you have described above is exactly the one that Aon Hewitt have been looking at in some detail (see our full research paper and an 8 page summary of it at http://www.aon.com/unitedkingdom/defined-contribution/collective-dc.jsp).
Compared to an individual DC plan, a CDC plan set up like this results in incomes in retirement being one-third higher on average for the same costs and risk to the sponsor. Add to this that the member has a much better idea in the run up to retirement what their level of income is likely to be, what's not to like? And that's the reaction we've now heard from a number companies - "why wouldn't this be something we looked at seriously it's permitted in law". If any employers want to have their say on CDC but haven’t got time to complete a full consultation response, please fill in Aon Hewitt's brief survey and we'll forward your views formally to the DWP (https://www.surveymonkey.com/s/collectivedc).
Let's give CDC a chance in the UK.
Comment by Dr Hari Mann posted on
For the past four years, the RSA has been working at supporting the debate for Collective Pensions in the UK. We have undertaken several studies into the benefits of such schemes. The findings are clear and consistent, people’s standard of living in the UK would receive a major boost if the government were to act now to enable the introduction of collective pensions. Examining how collective pensions have performed over the past 57 years, the RSA’s Tomorrow’s Investor project found that collective saving would have given UK investors a 33% better outcome than saving as an individual. Given that we spend 6.5% of our GDP annually on private pensions, the move from individual to collective saving would have a considerable positive impact on national welfare, equivalent to a 2% increase in GDP.
Given the support of both the TUC and the CBI, we have a real opportunity to deliver changes to the pensions system that would benefit generations to come. Whilst the Netherlands and Denmark systems aren't perfect by any means, they do provide far better pensions that those we receive here in the UK leaving British Pensioners the 'the poor man' of Europe.
To learn more about the work of the RSA and about the benefits of CDC, our reports are available at http://www.thersa.org/action-research-centre/enterprise-and-design/enterprise/industry/tomorrows-investors