Collective DC is a bridge too far
We welcome the increased focus on defined contribution (DC) pensions announced recently in the Queen’s Speech. However, we wonder whether the introduction of rules to allow collective DC arrangements in the UK is a bridge too far for employers and the pensions industry?
We welcome the increased focus on defined contribution (DC) pensions announced recently in the Queen’s Speech. However, we wonder whether the introduction of rules to allow collective DC arrangements in the UK is a bridge too far for employers and the pensions industry? It comes on the back of a wave of pensions legislation in recent years, including auto enrolment, the liberalisation of post-retirement options in the Budget and the capping of charges. These fundamental changes are already stretching all those involved in providing workplace pensions. The
industry may now struggle to effectively implement collective DC (CDC), which is a completely new concept for the UK.
Quite apart from the impact on a market already in flux, there are also many well documented flaws with CDC that are yet to be addressed. They include questions of fairness across the generations, whether risks are properly managed and whether CDC can work effectively against the background of the UK’s ageing population and shrinking workforce. CDC also appears to be fundamentally at odds with the government’s recent moves to allow complete flexibility at retirement, given that CDC schemes are specifically designed to provide a retirement income. To be consistent with the Budget’s removal of the requirement to purchase an annuity, members of CDC schemes would have to be given the option of taking their benefits as cash. This raises the question of how such a cash amount would be calculated – how would the collective DC pot be carved up?
One advantage of CDCs is that economies of scale could lead to lower charges. Lower charges are generally a good thing for DC members, but they are not exclusive to CDC. Many large DC schemes already have charges which can more than match those under CDC arrangements. And where DC charges are higher than the government believes is acceptable, the proposed charge cap is already waiting in the wings to address the issue. By announcing the cap on charges from April 2015, it appears that the government has removed one of its own arguments for CDC.
Against the background of auto-enrolment and the removal of the requirement to purchase an annuity, the announcement on CDC seems at best inconsistent with other pension policy, and at worst as another layer of complication in an already overcomplicated industry. We doubt whether employers – not to mention employees – attempting to get to grips with auto-enrolment, charge caps, face-to-face guidance and the removal of the requirement to purchase an annuity will have the capacity (or desire) to deal with yet another pensions initiative.
To discuss the themes in this article further, please contact Stephen Bowles, Head of UK Institutional Defined Contribution at Schroders, on +44 (0)20 7658 4916 or email email@example.com.
Schroders is a global asset management company with £268.0 billion under management and an international network spanning 37 offices in 27 countries. We have significant experience of managing DC assets and of helping scheme managers, trustees and sponsors to operate pension schemes efficiently. We manage assets for DC pension schemes in the UK and also have relationships with institutional investment platforms. With more than £36 billion in assets,
managed on behalf of both defined benefit and defined contribution pension schemes in both the corporate and public sector, UK pension funds form a significant proportion of our global client base.
Source: Schroders, at 31 March 2014.
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