The Government will back the creation of controversial collective defined contribution schemes in the UK as ministers look to wrestle back the initiative on pension reform.
The decision to support CDC schemes – whereby members’ contributions are pooled and the pension is paid from the collective fund – comes less than a week after pensions minister Steve Webb confirmed plans to introduce a cap on workplace pension charges in April 2014 had been delayed by at least a year.
According to The Times, measures to encourage the adoption of CDC schemes by UK employers, which would likely require changes to legislation, will be included as the “centrepiece” of a Pensions Bill before the general election in May 2015.
A report by the Royal Society of Arts, published last November, suggested introducing CDC schemes in the UK could boost retirement incomes by 33 per cent compared with individual DC.
But former Labour work and pensions secretary Lord John Hutton has warned CDC schemes create a greater risk of intergenerational unfairness, make it difficult for members to assess their exposure to risk and fail to account for individual circumstances. He also said the benefits of scale have been “exaggerated”.
Writing for Money Marketing online, independent pensions consultant John Ralfe described CDC as a “con” because it persuades individuals they are not taking on significant investment risk.
Syndaxi Chartered Financial Planners managing director Robert Reid says: “There are risks with CDC and the Government will have to be very careful it does not over-promise and under-deliver.”