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David Pitt-Watson: ABI wrong to attack collective DC


At a time when the financial services industry needs to regain public trust, it is disappointing to find the Association of British Insurers using your publication to undermine the sensible Government policy to allow collective defined contribution pensions to be introduced in Britain. Worse still to do it with flimsy and misleading arguments.

No pension system is perfect, but it’s worth reflecting on just how biased the ABI argument is. First it fails to mention the research evidence on the substantial advantages CDC can offer.

The Government actuary estimates that, for the same cost, a CDC pension will be 39 per cent higher than those currently offered by the insurance industry. Aon Hewitt has modelled what pension outcomes would have been for the last 57 years in the UK, for collective versus individual pensions. Collective pensions would have provided 33 per cent more, and would have been more predictable.

That is why the government and the opposition seem supportive as are the CBI and the TUC, as well as the National Association of Pension Funds and the Association of Member Nominated Trustees. They all believe that Britain should be offered the choice of collective pension provision.

The ABI are right to say that CDC does not guarantee higher retirement income. But modelled over the last 57 years, CDC pensions would have outperformed in 37 of those years, giving steadier and higher average outcomes. Individual pensions would have been more volatile, and would have outperformed in only 20 of those 57 years. 

They are right to say pensions in payment can, and have been reduced in CDC or similar systems. Dutch pensions have, on average been reduced by 2 per cent in response to the financial crisis. But of course if they started off more than 30 per cent higher, Dutch pensioners might consider that a cost worth paying.

The ABI say that collective pension systems can be unfair between those who have and have not retired. That is equally true in the current system where in the last 12 years, pension annuity costs in the UK have fallen by some 50 per cent, hurting those who had been saving for retirement. Individual market based solutions hit the young just as much as collective ones.

But they are wrong to suggest CDC would require UK pension savers to give up their current rights. First, there is no proposal to close down the current pension system, only to offer a choice to employers. Second, collective systems allow for people to save more or less.

They are also wrong to say CDC requires a collective labour market.  Collective systems exist in many places around the world apart from Holland.  The TIAA Cref system in the USA is a collective system.

They say they are puzzled that so many on the centre-left of British politics are fans of collective pensions, since poor people tend to die younger. The reason that the TUC and others are big backers of collective pensions because they offer better benefits, they share risk, and they can help limit high fees.

The ABI claim that CDC schemes are less transparent and more complicated than UK workplace schemes. But there is no reason that this should be true and it is a bit galling to be receiving lessons on transparency from the industry body which has opposed telling people the full charge which is being made on their pension fund!

They say CDCs increase the risks of market concentration. But default schemes in individual DC pensions have precisely these same characteristics.      

CDC would offer employers and employees choice. The ABI interprets this as placing “a much greater burden on employers”, because they have that choice. 

They then suggest CDCs will need someone to guarantee outcomes. CDC’s don’t guarantee outcomes any more than individual DC’s – they just give better and more predictable ones according to all the research so far undertaken.

We all understand that the ABI currently makes its money from individual pensions.  No-one will stop them doing that in the future. But to offer such a biased critique of the collective alternative does them, and the British pension saver, no good at all.

David Pitt-Watson is executive fellow in finance at London Business School and leader of the RSA’s ‘Tomorrow’s Investor’ programme



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There are 4 comments at the moment, we would love to hear your opinion too.

  1. And there’s me thinking that the ABI was trying to bring some balance to the rose tinted glasses being worn by those extolling the virtues of CDC’s.

    I also fail to see how the introduction of CDC’s or the ABI’s critique will affect public trust which is driven by the constant negative press from those with political agendas.

  2. This man misses the key point which is most of the CDC arguments are predicated on modelling which involves equities out-performing bonds. This was exactly the thinking that bought DB to it’s knees.

    The Government Actuary’s research assumes 100% invested in equities….this is 1980s thinking

  3. The ABI are entitled to raise concerns to add to the debate. The survey mentioned after all was largely over the post war boom years. It was the end of the post war boom years that caused the collective With Profit funds to become out of favour and cause problems.

    Members would be locked into a collective fund that one mistake or a change in demographics or a new product placement could potentially cause havoc to the pensions in payment.

    There is cross generational transfer and it does not take into account current preference for matching risk to the individuals preference.

    There are legitimate issues with CDC schemes and shouting down those who raise them won’t result in a good policy if they do come to being.

  4. Correct me if I’m wrong, but aren’t CDC schemes run along the lines of With Profits schemes? The funds are invested and at the end of the year, some of the gains the fund makes are returned to the members and some are retained by the scheme to support future increases in pension payments. I’m not certain that With Profits is such a great (and new) idea now…

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