Dutch style CDC pensions - cart before horse?
CDC’s (collective defined contribution pensions) can be used to pool risk and drive cost efficiencies and have been popular in some European countries. As ever there are many pros and cons and CDC’s are far from the magic wand many are portraying them as!
Certainty of cost will be attractive to employers and the ‘group’ concept could be beneficial to encourage participation, particularly for smaller employers who are struggling with auto-enrolment and lower paid earners.
Many employers may well accuse the government of putting the cart before the horse when it comes to CDC schemes as this initiative should have been announced before auto-enrolment began – many employers for whom CDC could be appropriate have already gone through a painful and costly auto-enrolment process.
Benefits are not guaranteed and there is a sense of ‘with-profits’ about the scheme – increasing income when the scheme does well and reducing income if the scheme does not perform, as happened for many Dutch CDC schemes after the last economic downturn.
As we know, ‘with profits’ has become a much lambasted and archaic means of investing and was heavily criticised for not delivering transparency and value. CDC schemes will face similar challenges in these key areas and must improve on previous efforts!
The big downside of CDC’s is the lack of sophistication and ability to tailor benefits to an individual’s bespoke circumstances. It is interesting that some Dutch commentators are now speaking out in favour of the UK’s individual pension scheme approach rather than their CDC scheme approach.
As ever with pensions, there would be winners and losers with CDC schemes. As such, it will be interesting to see how these schemes are implemented - undoubtedly this will take time but will they be able to design schemes so that those who need or want increased sophistication and flexibility are able to do so?
Steve Webb, who has achieved much in his time as pensions minister, is the driving force behind CDC schemes and there is no doubt the CDC initiative will take years to implement. Unfortunately however, Steve Webb is unlikely to be in government after the next election and one wonders how this initiative will develop without his passion and involvement.
As featured in Financial Planner Online - click to read the story.