Michael Johnson: Why collective DC could undermine pensions freedomhttps://www.professionaladviser.com/pro ... ns-freedom
Collective defined contribution (CDC) schemes risk creating "irreversible intergenerational injustice" and could undermine pension freedoms, Michael Johnson says.
Should CDC - an alternative to traditional workplace pension schemes be introduced there is a possibility that current and future employees could end up overpaying for the benefits of current pensioners, and the lack of "individual property rights" places the mooted scheme type "at odds" with pension freedoms.
CDC schemes sit somewhere between traditional final salary arrangements and defined contribtion (DC) schemes and aim to better share risk between employers and employees.
In a damning report published on 30 July, the Centre for Policy Studies (CPS) research fellow and pension freedoms architect said to add in support for pension freedom and choice would be too difficult and expensive.
"Personal pension freedoms have been central to the recent reform agenda and have proved very popular," he said. "CDC pension schemes are incompatible with these freedoms without compromises which add additional cost and complexity.
"Royal Mail should move away from its planned CDC scheme and instead adopt a system where each employee has their own, personalised savings pot."
The report - A Risk Too Far: The Case Against CDC Pensions - argues "the Department for Work and Pensions is sensibly demurring on proceeding with CDC schemes", noting there is little private sector appetite at present, with Royal Mail being the exception.
It added "CDC schemes in the UK are superfluous" and outlines 10 risks associated with CDC, including regulatory, legal and reputational.
It added that international examples - from the Netherlands, Canada and Germany - have "either been considered a failure, or the particular circumstances are not applicable to the UK".
Therefore, much more legislation is needed to reduce risks and provide "enough clarity" on whether CDC benefits would be included on a company's balance sheet as a liability, where CDC would sit between defined benefit (DB) and DC definitions, and how such benefits would be taxed.
Instead, Royal Mail, or other companies considering CDC, should use the size of their workforces to "negotiate access to low cost with-profit funds, overseen by an independent body" which would be provided by NEST and "have similar performance drivers to a CDC scheme".
A spokesperson for Royal Mail said the company wanted to offer such a scheme as soon as possible.
"With the Communication Workers Union, we have committed in principle to the future introduction of a CDC scheme for all Royal Mail employees. A DB lump sum sccheme would sit alongside it," they said.
"We had detailed discussions with our unions about our future pension arrangements. They had to be sustainable, affordable and secure for members and the company. We agreed that CDC would be a progressive option which would meet our objectives.
"We see CDC as a better way of providing a regular wage in retirement for our people than is otherwise available through DC pensions, but without the increasingly unaffordable guarantees of DB pensions for the employer."
Johnson's comments come after the Work and Pensions Committee called on the government to introduce CDC schemes and launch the "next great pensions revolution".
In a report published earlier this month, the committee's MPs said CDC was the "best means" of achieving balance between benefit security and the pension freedoms.