Advisers and employers say the Government would have to overcome significant cultural and regulatory challenges if its radical plans to encourage collective defined contribution schemes are to succeed.
The Department for Work and Pensions is investigating how to make it easier for employers to set up pooled DC funds. In theory, this could result in lower charges due to economies of scale and higher returns due to increased risk exposure before and after retirement.
Confederation of British Industry director for employment and skills Neil Carberry says an “absolute maximum” of 12 large employers could be interested in the model.
Carberry says: “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.
“There is a fundamental culture change that will be required if collective DC is going to work in the UK market.”
Rowley Turton director Scott Gallacher says: “This could represent a monumental shift in the way pensions are provided. In my view it is a recipe for disaster and people will not accept that their retirement income is not fixed.”
Hargreaves Lansdown head of pensions research Tom McPhail says: “There are cultural, regulatory and fiscal barriers to CDC schemes which make it unlikely this initiative will succeed.”
Pensions minister Steve Webb told the Financial Times that CDC investment returns could be 40 per cent higher than standard DC.
However, industry experts have queried the calculations. Aviva corporate benefits head of policy John Lawson says: “This assumes that equities will outperform gilts by 4 per cent in the 30 years someone is retired.
“The problem with that argument is over the last 30 years equities have only outperformed gilts by 1 per cent.”
A DWP spokesman says: “There are a number of different models of CDC, some involve guarantees such as that pensions in payment cannot be reduced, and others do not. Guarantee features will affect the forecasted investment return benefits of some CDCs.”