Forever anxious to make pension savings more attractive, the Government is investigating the merits of the Collective Defined Contribution schemes which are available in some other countries.
Most private sector companies have ceased offering defined benefit schemes, which promise to pay a pension whose value is defined by reference to the employee’s final salary, and are offering instead defined contribution schemes under which the value of the pension depends on the performance of the investments into which contributions are placed.
Like defined contribution schemes, Collective Defined Contribution schemes receive contributions from both employers and employees but they go much further than simply pooling investments in order to achieve cost savings and a wider range of investment opportunities. They also pay retirement benefits to the members.
In this respect they operate rather like a With Profits insurance policy, by smoothing the investment returns in such a way as to reduce the impact of downturns in the stock market. For example, the value of Dutch schemes fell by only between 2% and 6% in 2008, when the stock market fell much further as a result of the global economic crisis.
In the Dutch example, investment decisions are taken by appointed managers, with input from trades unions, and members are given a target retirement income but may be asked to make additional contributions in order to achieve this.
As a middle road between defined benefit and defined contribution schemes, Collective Defined Contribution schemes appear to have merit. However, it is difficult to imagine how such schemes could accommodate the flexibility which savers in defined contribution schemes will enjoy as from April 2015, to draw their benefits in cash at any time after the age of 55.
If the Government decides to introduce Collective Defined Contribution schemes in the UK, they could become available as early as 2016. However, their success would depend on the willingness of employers to switch from traditional defined contribution schemes.
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