The Confederation of British Industry says Government plans to encourage large employers to offer collective defined contribution schemes would require a “fundamental culture change” in UK pensions.
The Department for Work and Pensions is investigating how to make it easier for employers to set up pooled funds into which employees pay their pension contributions.
In theory, this approach could result in lower charges for members as the fund would benefit from economies of scale.
In an interview with the FT published today, pensions minister Steve Webb also claimed investment returns from collective DC schemes could be up to 40 per cent higher than standard DC because they can invest in riskier assets such as infrastructure.
Webb said he had held meetings with “big employers” who had expressed an interest in offering a collective scheme.
CBI director for employment and skills Neil Carberry says an “absolute maximum” of 12 large employers could be interested in collective DC.
He says: “It is certainly true that, if a more permissive legal structure existed, there are a small number of very large firms who might choose to play in a “halfway house” between DB and DC.
“You would have to get the structure right and it would involve things that, at the moment, are relatively alien to the UK pensions debate.
“Most notably a collective DC scheme is, in essence, a large with-profits scheme with all the strengths and weaknesses of with-profits. That means you would have to have an environment where, in tough times, it is tolerable for members’ fund values to drop.
“That is something that has not been the case in the UK, outside of where a sponsor has gone bust and entered the PPF.
“There is a fundamental culture change that will be required if collective DC is going to work in the UK market. That is both a political and a business culture change.”
Carberry also says employers scarred by large defined benefit pension deficits will be concerned about the potential costs of offering a collective DC scheme.
He says: “Lots of businesses will worry that if they decide to play in this market, the first time something goes wrong that aspiration suddenly becomes a promise and we will be back to where we were with DB.
“The pensions minister has had a discussion about collective DC with a small group of employers who employ a large number of people.
“That is what is attractive to the minister about this because if you capture one or two of these major firms then you potentially have tens of thousands of people.”