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Labour criticises Govt collective DC plans

Shadow pensions minister Gregg McClymont has hit out at the Government’s plans for collective defined contribution schemes, warning proposals are “silent” in three key areas.

CDC schemes function in a similar way to traditional with-profits schemes, using extra investment returns in the good times to make up for lower returns in the bad. Pensions are then paid out of a collective fund.

Speaking in a House of Commons debate on the Pension Schemes Bill yesterday, McClymont said the Government has failed to clarify how the risk sharing will work, what governance will be required for these schemes and what type of CDC scheme the Government wants to encourage.

He said the three areas will be dealt with through secondary legislation which cannot be amended by Parliament but only accepted or rejected wholesale.

He said: “This is something of a pattern under this Government…I’m not sure this is a sensible way to proceed if we want to make substantial good legislation.”

In June, Money Marketing reported on the intergenerational tensions in Holland that emerged when young people had to subsidise pensions in payment, with one adviser to the Dutch government warning “solidarity mechanisms” must be set out in advance for the schemes to work.

McClymont said: “In a cross generational pension fund the smoothing of risk and reward between different generations can mean in extreme circumstances that the pensions in payment are cut. That is something with which our politics is not familiar and it has to be considered.

“Managing a rolling pension fund that brings together the savings of teenagers, pensioners and every generation in between and demands each cohort is treated equally requires a substantial level of technical expertise. The prize if managed correctly can be bigger pensions, but this demands governance of the highest quality and the bill is silent on governance.”

Labour wants CDC schemes to be required to have a trustee as well as a legal duty to prioritise the interest of savers above all others, the logic being it will stop firms raiding the pension funds.

Responding for the Government, Treasury financial secretary David Gauke said regulations on scheme governance would be brought forward under measures in the Pensions Act 2014. This allows Government to place mandatory requirements on the scheme itself or trustees or administrators.

He added that the Pension Schemes Bill does not proscribe the form of benefits for CDCs but is instead intended to “encourage a variety of designs”, adding that any intergenerational risk sharing must be done transparently.

He said: “It’s a lesson we’ve learned from how these schemes have operated in other jurisdictions.”

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