Connected Research

Union policy research in the 21st century

Collective DC schemes – DWP speaks (softly)

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To very little fanfare (to whit: no press release), the DWP has published three documents on how collective DC schemes might operate in the UK.

Collective DC schemes are a Dutch invention and their potential applicability in the UK, encouraged by particular proposals from Hewitt Associates, first came to light in 2008 during the DWP’s continuing examination of risk sharing in the pensions context. Essentially, a collective DC scheme is a pooled investment vehicle based on a particular set of target benefits, paid for entirely by the employer, with employees paying additional contributions for an improved set of benefits. This type of arrangement also potentially lends itself very well to quality governance arrangements based on a board of trustees. In the shift from defined benefit to defined contribution, collective DC has something to offer and Connect earlier welcomed the opportunity for their further exploration, albeit outside the specific context of risk sharing.

The DWP ‘package’ consists of a summary document, a modelling of the likely operation of collective DC schemes in the UK and a research report into employer attitudes, including the scale of likely demand. The conclusion is that the government needs to take no further action, not least since the positive outcomes of these sorts of schemes in some areas are, the DWP concludes, outweighed by the drawbacks – while employer demand is likely to be limited.

The latter is, of course, a key criterion. The DWP’s research here concludes that employers have different approaches based on the the type of scheme currently operated but that, overall, demand would probably remain low:

– sponsors with open DB schemes considering closure and employers that had already moved to a DC scheme would not consider collective DC on the grounds that the additional costs compared to a DC scheme were not justifiable [that says sufficient!]

– employers with trust-based DC schemes were reluctant to add to trustee duties since trustee recruitment would become more difficult [hmm]

– employers with contract-based DC schemes who would like to deliver a better pension to their employees might, however, consider a collective DC scheme, especially if these became the expected norm.

This overall conclusion is something of a shame, since collective DC schemes do offer a more beneficial approach to pensions saving than ‘pure’ DC, while remaining of the DC type – i.e. they contain no guarantees that the ‘targets’ for the retirement benefits will be met. The ‘collective’ approach is evidently attractive in a trade union setting – although one of the reasons for the DWP’s conclusion is that the dangers of inter-generational cross-subsidy might lead to perceived unfairness – while, as Kay Carberry, Assistant General Secretary of the TUC, has argued this morning, collective DC does potentially offer something towards the fundamental need to improve governance in DC arrangements (many of the hard-fought-for improvements in pension scheme governance is endangered by the sliding away of DB schemes).

Nevertheless, it is the employer approach to costs which is the key. An employer-only contribution of 12% (and for a not particularly attractive basic benefit of a 1% career average scheme and retirement at 68) represents something of a ‘challenge’ to employers making an average contribution into DC schemes of just 7.00% (albeit that this figure is rising). As always, the scale of contribution that an employer is prepared to make is the acid test of its intentions – and, it would seem, a contribution of 12% lies beyond where employers are – currently – prepared to go.

Challenging that – and pushing that boundary further – will be a key task for unions and employees as the economy improves. Exposing the inadequacy of pensions based on an insufficient contributions structure will be a major component of that, in which the structures and benefits provided by a collective DC scheme might play a useful comparative role. In this context, I hope that the concept is not entirely dead.

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Written by Calvin

16/12/2009 at 1:12 pm

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