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MPs call for collective defined contribution pensions

MPs have encouraged the government to seek innovation and the “great potential gains” of collective defined contribution pension schemes, a report published this morning by the work and pensions committee says.

The committee says the schemes, which are already highly successful in Denmark and the Netherlands, offer advantages of a middle ground between defined benefit and defined contribution pension schemes.

CDC pensions – which are not yet available in the UK – offer regular retirement income but in the form of target benefit rather than a guarantee.

MPs have said employers will remove the risk of large long-term pension liabilities on their balance sheets, and employees will welcome the prospect of a regular and reliable income in retirement.

The report details evidence and responses to the initial inquiry into CDC schemes launched in November last year.

The Confederation of British Industry says that while the potential benefits of CDC pensions are evident, “so too are the potential risks and there is not yet a clear picture of the appetite among employers to offer such schemes.”

While the Royal Society of Arts says big companies, especially those closing DB plans, have lobbied for change. The Society of Pension Professionals says that while the Pensions Act 2015 was under consideration there were between 10 to 20 large employers with a “serious interest in developing this type of provision”.

The Association of British Insurers, meanwhile, believes CDC schemes may be a “backward step” by savers who value the flexibility of DC and arecoming round to the idea of owning their own pension.

The report concludes with the notion that through the pooling of risk, CDC schemes offer members the potential for “better pensions” than the standard DC savings. It adds they may be more appealing to people who desire a regular and reliable income in retiremen,t and offering more “good choices” would be “entirely consistent” with the pension freedoms.

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  1. It all sounds rather nice, but there are issues. Clearly this isn’t horizontal risk sharing – if I and a bunch of others have the same default investment mix we get the same outcome now without CDC – it’s sharing risk over time – so good times subsidise the bad. Sort of like With Profits. Which is all well and dandy – but it doesn’t work when you give people the information, and the freedom to game the system. Which is what pensions freedoms do.

    So CDC is great, but to make it work you have to dump pensions freedoms, and transfers outside of the ‘CDC’ club – as otherwise those with a bigger entitlement than the value of their assets and the knowledge to exploit the situation will take advantage of their enhancement and reduce the pot for everyone else.

    Pooled returns, transparency, freedom of choice. You can have any two without the wheels falling off.

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