A new type of pension scheme, defined ambition, will not be a panacea for workplace pension planning, advisers have suggested.
DA, also known as collective defined contribution, could address some of the concerns that policy- makers and the public have about the current pensions landscape, according to a recently launched inquiry by MPs on the work and pensions select committee.
DA schemes, which are commonplace in the Netherlands, Canada and Denmark but not yet allowed in the UK, differ from traditional defined benefit schemes in that employees are not promised a definite retirement income. A CDC scheme instead has a target or “ambition” amount it will pay out, based on a long-term, mixed-risk investment plan. CDCs aim to pay out an adequate level of index-linked pension for life but this is an ambition rather than a contractual guarantee.
CDC schemes differ from traditional defined contribution schemes because they do not produce an individual “pension pot”, which savers then have to decide how best to use for their retirement, but invest their savings in a larger “collective” pot, which then provides an income during retirement.
Advocates of CDC schemes argue that they provide greater assurance of retirement income and more efficient pooling of costs and risks among members than traditional DC, but do not impose the burden of underwriting an onerous pension promise on employers. Studies by the Royal Society of Arts and Aon Hewitt estimate that CDC could have delivered 33 per cent better pension outcomes than traditional DC over the past half-century.
However, advisers doubt that employers will treat pension planning differently under the new arrangements.
Rowley Turton planner Scott Gallacher says advice would be similar to that given to those in a DB scheme now, just with an acknowledgement that the CDC scheme is not guaranteed in the same way and the benefits could be reduced.
He says: “As an alternative to those closing DB schemes, CDC is an attractive option but I would expect those employers without DB schemes to stick with their existing DC schemes.”
Former pensions minister Steve Webb, one of the architects of CDC, says the scheme has fallen off the Government’s priority list.
Webb says: “For advisers, a challenge would be understanding the nature of the pensions targets in a client’s CDC scheme and how likely they are to be met. It is possible that some form of collective arrangement post-retirement is the most likely area where we could see innovation in years to come.”
KPMG pensions partner David Fairs says: “When Webb put forward the idea of DA, there were enough final salary schemes still open to make this a timely and interesting proposal. Since then many more final salary schemes have closed to further accrual and it may now be too late for their introduction.”
Hargreaves Lansdown senior pensions analyst Nathan Long adds: “DA looks destined never to get out of the starting blocks. While risk sharing in workplace pensions is an admirable initiative, unfortunately it is a solution best suited to the pension landscape 30 years ago. The freedom and flexibility now offered by pensions, coupled with ever more flexible working patterns, will be almost impossible to make fit with smoothing of investment returns without giving up potential for investment growth.”
President of the Society of Pension Professionals Hugh Nolan agress DA is a “dead duck”.
He says: “The introduction of defined ambition won’t have an impact on DB transfers as any change would be for future service only or would require DB to DA transfers rather than DB to DC.”
Sackers partner Claire Carey agrees: “Even if DA arrangements get the legislative impetus needed to promote their wider development, this is unlikely to have a significant impact on existing benefits under DB schemes. This is because the Government would need to be minded to permit changes to accrued rights. Of course, the greatly anticipated White Paper on DB schemes may shed some light on Government thinking here.”
However, LCP partner David Everett sounds a positive voice on outcomes for clients.
He says: “When CDC schemes have been discussed in recent years they have generally been warmly received. Employees and the Government like the better expected outcomes compared to DC schemes, while employers like the fixed contributions but are nervous about ‘legislation creep’ turning benefits into guarantees in the future.
“Since Steve Webb left office CDCs have lacked an obvious champion with the will and the power to drive forward the necessary changes. If the Government is keen enough to introduce CDC schemes to provide more ‘patient capital’, allowing severely underfunded DB schemes to convert those benefits into CDC forms that would make many employers sit up and listen.”