Former Labour work and pensions secretary Lord John Hutton has criticised Government proposals to encourage collective defined contribution schemes in the UK.
Last month, the Department for Work and Pensions published a consultation setting out plans to “reshape” workplace pensions. One of the key proposals in the paper was to encourage the development of large-scale CDC schemes in the UK.
In these schemes, which have been used in the Netherlands and Denmark, members’ assets are pooled and risks are shared. The employer pays a fixed rate of contributions and has no liability to the scheme.
In its consultation paper, the DWP says modelling from DWP and the Government Actuaries Department conducted in 2009 suggests there is a “good likelihood” of better outcomes in CDC compared to individual defined contribution schemes,
Writing in the FT today, Lord Hutton warns 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 says encouraging CDC in the UK would require a major regulatory overhaul and claims the benefits of scale are “exaggerated”.
“The claims being made for these schemes need very careful examination,” Hutton says.
“A much better way forward would be to look carefully at how we can improve existing DC schemes. The first change would be to design investment strategies that target income and manage the right risk, namely income shortfall risk.
“The second is to frame communication with members about outcomes and risk in income terms, re-establishing the connection between saving and retirement. The third is to use this connection to encourage members to save more and be prepared to work longer – essential if we are to meet the demographic challenge.
“These changes would be as revolutionary as introducing CDC but would provide better prospects of improved retirement incomes and greater assurance about what those incomes will be. What is more, they are feasible today and do not require legislation. We could get on with this now rather than waiting years.”