Why 'collective pensions' just won't work
As if pensions weren't going through enough upheaval at the moment, the government has introduced its plans for 'collective defined contribution' (CDC) workplace schemes.
For those who aren't in the know, CDCs are a mid-point between defined benefits (DB) scheme (where pension income is the responsibility of the employer and based on a multiple of final salary and number of years worked) and defined contribution (DC) schemes (where income is the responsibility of the employee and based on how much you save and how well the stockmarket does).
CDC pay out a set income but that income is still reliant on saving a set amount, usually between 10% and 12% of salary, and stockmarket performance.
Collectives rely on people staying invested in the pension, much like a DB pension, as income can only be paid out if people are contributing - so even in times of stockmarket falls pensions can still be paid. And this is where the problem with CDCs lie; under the Budget changes everyone can strip all their pension cash out of their scheme when they retire.
If all retirees took all their pension cash out, then the pot would diminish rapidly and younger savers wouldn't be guaranteed as good a deal when they retire. This is a bit of a conundrum and means that the government would surely have to stop employees in collectives from using the new pension drawdown freedoms and accessing their entire pension pot.
There is no other way to square the circle – collectives need money to stay invested and retirees will want to take their money out.
On this basis, the idea of collectives pensions seems like a waste of time. Which employers would waste their time offering a scheme that limits what their employees do with their pension cash? Could it even cause a legal battle between employees and employers if people are not given a choice?
If employers offer CDCs instead of DC schemes, where money can be accessed, then fewer workers may be incentivised to save and that is definitely not want the government wants to see happen.
I appreciate the government is trying to provide better outcomes for retirees and CDCs in Holland have shown they deliver 30% more pension income than a DC but for those who want flexibility in retirement the increase in income may not be enough.
The government needs to think seriously about just how the pensions jigsaw fits together in the UK.