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Collective pensions are moving rapidly from Marmite to mainstream

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There are many issues which split the country: Marmite, which one is Ant and which Dec, and the odd constitutional wrangle.

In the small world of retirement policy a particular form of pension called Collective Defined Contribution (CDC) or target pension divides pensions geeks. By pooling members’ money, its proponents expect it to deliver less volatile, possibly higher, returns though longstanding opponents mutter darkly that the maths is murky and flawed.

But there are growing indications that ministers are on the cusp of moving beyond entrenched debates to devise rules allowing CDC. This, the TUC believes, could improve the retirement prospects of hundreds of thousands of working people.

Pensions Minister Guy Opperman told MPs yesterday: “We are minded to assist but at the same stage but I don’t want to give cast iron guarantees.”

This is a notable, and welcome, shift in position by a department that halted work on the subject in 2015, and has shown little interest since.

It is to a large extent testament to the work that the CWU trade union has done with Royal Mail. A deal thrashed out after CWU secured a huge mandate for industrial action to defend pension provision would see all 144,000 postal workers enrolled in a collective scheme that aims to provide a replacement wage in retirement.

CWU and Royal Mail have since worked together to make the case for rule changes to allow such a scheme to be launched.

“There is no doubt that the CWU have worked hand-in-glove for the benefit of their members… They are being very progressive,” Opperman told the Work and Pension committee of backbench MPs.

An inquiry by the committee, whose chair Frank Field seeks a “collective alternative” to individual provision, has given further impetus to the implementation of CDC.

The TUC is a longstanding supporter of CDC pensions. There are three key grounds for reform:

  • The inefficiencies in the individual defined contribution pensions that so many workers are now enrolled in. Such a system restricts economies of scale and the ability of schemes to invest for the long-term.
  • We dislike the creation of what we have termed a Pensions Lottery with savers income in retirement heavily reliant on the luck of investment markets. The TUC’s work on the subject was cited in evidence to Parliament yesterday.
  • The launch of so-called pensions freedom, which doesn’t give workers a straightforward route to generating an income in retirement. Two of the fastest growing pension providers, state-backed NEST and the not-for-profit firm behind the People’s Pension have both made the case for CDC-style risk-sharing at retirement.

But it remains the TUC’s position that defined benefit provision, if secured on sensible terms, is almost always preferable. Such schemes provide an income based on salary and service in retirement but with greater obligation on the employer to fund them.

It is notable that there is widespread support for allowing the introduction of CDC schemes across industry and politics.

The employers group the CBI argues for a “third option” for employers between DB and DC.

Legislation paving the way for CDC pensions was brought in by the Coalition Government in 2015. CDC is also supported by the Labour Party.

CDC is already common in countries like the Netherlands and Canada.

The task for the UK is to learn the lessons from this overseas experience and implement rules that work for our own set-up.

This will require decisions on issues such as the most efficient way of creating the necessary regulations, which might involve bypassing the 2015 legislation. Decisions will have to be made about governance. There is a strong argument for having schemes overseen by trustees, including member trustees, with a duty to act in members’ interests. Questions of regulation and whether schemes will have to hold a capital buffer will also have to be settled.

But what Opperman’s comments suggest is that that this work is finally beginning to happen. Collective pensions are moving rapidly into the mainstream.

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