A shift to Dutch-style pension schemes could see savers given less control over their investments – and more money going towards the government‘s growth plans. Chancellor Rachel Reeves is paving the way for more collective defined contribution (CDC) schemes, The Telegraph reports, based on the premise that they offer better returns and less risk.
CDC schemes offer members the stability of a regular target pension income for life after retirement, based on pooled contributions from employers and employees into a collective fund.
The schemes are considered safe bets for employers and cut the risk of pensioners outliving their savings – but the downside is that the target income can fluctuate based on factors including investment performance. Since the approach is collective rather than individual, it also limits agency around choice of investments and spending in retirement.
While the Netherlands is commonly viewed as one of the world’s best countries for pensions, its CDC schemes have come under scrutiny for their lower-than-expected targets based on underperforming investments.
A House of Commons briefing also warned that employees who die earlier could be worse off under CDC schemes because they have effectively subsidised their longer-living counterparts.
CDC schemes are already in place for Royal Mail employees in the UK – although in their current form, the plans can only involve a single or connected employer. A greater focus on this kind of pension could involve the introduction of industry or sector-wide multi-employer schemes – something the government has committed to facilitating.
Pensions Minister Torston Bell said last month that individual schemes meant people were facing “significant risks about how their individual investments perform and how long their retirements last”.
“Pooling some of those risks will drive higher incomes for pensioners and greater investments in productive assets across the economy,” he said.
However, Tom Selby of AJ Bell accused Labour of plotting to use other people’s money to doggedly pursue a growth agenda and criticised the government’s favourable comparison of the schemes to annuities, which can be bought with pension pots and effectively guarantees an income for life.
“There is no guarantee that CDC schemes will deliver higher incomes than existing defined contribution schemes,” he said, “And comparing them to annuities suggests the income setup is the same, which it isn’t.
“Annuities pay a guaranteed income for life, whereas CDC scehemes aim for a target income which could be reduced if investments underperform, which is exactly what happened in the Netherlands.
“Offering people a choice of retirement income options is a good thing, but the Government needs to be transparent about what’s really happening here – it wants to use other people’s money to deliver on its economic agenda.”