Collective defined contribution pension schemes risk creating intergenerational injustice and undermining pension freedoms, warns the Centre for Policy Studies.
In a report published today, CPS research fellow Michael Johnson says the evidence on countries that have such schemes, including the Netherlands, Canada, and Germany, is mixed.
CDC pensions – which are not yet available in the UK – offer regular retirement income but in the form of a target benefit rather than a guarantee like final salary schemes.
Johnson says CDCs risk creating irreversible intergenerational injustice by overpaying pensioners at the expense of current and future employees.
He adds there is also no commitment to put in place the necessary pre-funding to counter this risk and current legislation does not provide enough clarity on how CDCs would be administered.
Johnson also criticises Royal Mail’s plan to offer employees a CDC scheme and argues it has given CDC lobbyists an opportunity to leverage their cause by attaching it to help settle what he calls “ultimately a labour dispute”.
In mid-July the work and pensions select committee published a report encouraging the government to create CDCs.
It said they offer advantages of a middle ground between defined benefit and defined contribution pension schemes.
However, Johnson proposes Royal Mail uses the size of its workforce to negotiate access to low cost with-profit funds, overseen by an independent body.
He says: “Personal pensions freedoms have been central to the recent reform agenda and have proved very popular.
“CDC pension schemes are incompatible with these freedoms without compromises that add additional cost and complexity.
“Royal Mail should move away from their planned CDC scheme and instead adopt a system where each employee has their own, personalised, savings pot.”
A Royal Mail spokeswoman says: “We had detailed discussions with our unions about our future pension arrangements. They had to be sustainable, affordable and secure for members and the company. We agreed that CDC would be a progressive option which would meet our objectives.
“We see CDC as a better way of providing a regular wage in retirement for our people than is otherwise available through DC pensions, but without the increasingly unaffordable guarantees of DB pensions for the employer.
“We agreed with the Communication Workers Union to jointly lobby government to make the necessary legislative and regulatory changes so a CDC scheme can be established. We want to be able to offer a CDC scheme to our 141,000 strong workforce as soon as possible.”