Pensions minister Steve Webb is set to propose radical plans for collective DC pension schemes with the aim of better sharing risk across members.
Speaking to the Financial Times, Webb said collective private pension schemes, which combine pension funds of “big, household name” firms, could provide better returns for retirees.
A central aim of collective DC schemes, which already operate in The Netherlands, is to better share the risk across members and allow older investors to take more risk and get more return from their asset allocation before and after retirement.
In December 2009, under the previous Labour government, the DWP looked at collective DC proposals but rejected the idea due to concern about ”unacceptable intergenerational unfairness” in the plan and a risk of breaching European legislation.
However, the idea was floated as one of a number of possible proposals in Webb’s policy paper Reinvigorating Workplace Pensions, published last year. The paper also suggested the use of ’auto-escalation’ to increase contributions and a number of ideas for “defined ambition” pensions provision as a bridge between DB and DC provision, including offering Government guarantees.
Webb told the FT that large employers had expressed interest in moving into a collective scheme. He said: “If you can make it work, you’ve got the chance for significantly better outcomes.”
Webb touted two possible models for collective DC schemes in today’s FT interview. One would see the industry set up a collective scheme itself with Government providing a regulatory structure.
In another model, the Government could underpin schemes through a guarantee or lifeboat scheme.
Webb said: “You could imagine a DC protection fund or something that pooled some sort of insurance contribution and provided certainty…There could be a role for the private sector.”