The best CDC design is collective implementation with clear ownership rights

September 2014

As the UK debate on collective solutions progresses, there are many areas to consider.

In the consultation paper ‘Reshaping Workplace Pensions for Future Generations’ from the Department of Work and Pensions, the Collective DC and the Pension Income Builder models reflect elements of the Dutch and Danish approaches respectively. These contain both good and bad elements and it is vital that the UK learns the key lessons of these countries’ experiences to ensure the best solution is achieved.

Correctly implemented, it is possible that such models could help mitigate some of the current market imperfections in the financial services industry. However, new research demonstrates that one of the major supposed advantages of collective schemes – the superior financial outcomes achieved for members – is questionable. Acknowledging that additional drawbacks may also arise from collective schemes, it is clear that if collective defined contribution (CDC) is adopted in the UK much care will be required to ensure that the benefits are captured while the drawbacks are avoided.

Overall, the direction outlined in the Pension Schemes Bill is positive but the devil is in the detail – there is the potential to make great improvements to the UK’s current individual DC arrangements but, equally, a poorly implemented collective model will do little to lift the retirement prospects of the UK population.

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