An exciting time for pensions

December 2014
Are you excited by the recently announced shake-up of the UK pension industry with the introduction of collective defined contribution schemes? You should be.

Moves to revolutionise retirement savings were set out last month as the UK government proposed reforms that would allow workers to contribute to a Dutch-style ‘collective pension’ fund.

The overhaul will allow workers to pool their investments into a “mega fund” with potentially thousands of other members consisting of both pensioners and savers. The collective schemes, which could be introduced as early as 2016, are intended to deliver better value compared to individual pots through fee discounts and the potential to invest in longer term higher yielding assets. In addition, they should help improve stability and certainty around the final outcome given the shared nature of the risks.

At Cardano, we welcome the new legislation and, in particular, the proposed robust regulatory regime. The ability to implement collective solutions in a Regulatory Own Fund will make it possible to develop pension solutions that focus on income stability as well as the pooling of individual longevity risk.

We think the proposed strong framework will help protect the consumer and limit the probability of potential mis-selling scandals. In addition to this, we view internal accounting based on arbitrage free valuation methods, clear ownership rights of collective surpluses and predefined rules on what will happen in case of ‘underfunding’ as being an especially important part of these reforms.

While we think it may be difficult to reach economies of scale when setting up new collective solutions, we believe that a transparent and streamlined licencing process around the Regulatory Own Funds should help by removing one entry barrier.

In summary, the newly proposed reforms provide the UK worker with a potentially more stable pension journey with fewer surprises. It’s an exciting time for UK pensions.