Talking head: Pensions commentator Ros Altmann says the new at-retirement flexibilities introduced in this year's Budget will make it harder to attract employers and members to shared risk schemes.
There are advantages to such arrangements. Collective DC can offer members more certainty over their retirement incomes than individual DC and, as they tend to operate across many firms, they are not tied to the fortunes of just one company.
I do not expect the pensions bill to lead to a sudden rise in shared risk or CDC schemes
Ros Altmann
In particular, large pools of collective pension assets can offer economies of scale from lower charges and access to a broader range of asset classes or risk-reduction techniques. In addition, recent falls in annuity rates suggest paying pensions from the scheme, rather than buying in the private market, should boost payouts.
However, the security of members’ benefits in CDC is much lower than in DB because the expected returns that define the promised pension are not guaranteed. For example, in 2012, a quarter of the schemes in the Netherlands cut pensions by an average of 1.9 per cent in order to restore their finances. Indeed, when averaged across several generations, the increases in pensions could be much lower than expected.
From an employer’s perspective, though, shared-risk schemes are more appealing than DB because it knows what the contributions will be, rather than being at the mercy of markets.
Indeed, until the recent Budget pensions revolution, several employers had been considering CDC schemes. However, radical new freedoms have potentially undermined those plans.
CDC requires a large pool of assets retained for many decades to provide investment returns as well as pension payments over time. Nest might have been an ideal provider, but if members can cash in their pension fund at retirement the scheme cannot rely on assets remaining in place, making long-term scheme pension payments less feasible.
Therefore, on balance, I do not expect the pensions bill to lead to a sudden rise in shared risk or CDC schemes. The increase in individual flexibility and choice will make it much more difficult to attract members, and companies are likely to be wary too.
Pensions have to last many decades, but private firms may not last that long. The principle of pooling assets in order to reduce running costs and increase asset exposure is sound, but CDC may be a step too far for most firms.
Ros Altmann is a pensions and economic policy commentator
