CDC working group studies Dutch and Swedish schemes

Last week, pensions minister Steve Webb revealed in an interview with the Financial Times he had recently held meetings with “big, big employers, household-name firms” about creating a pooled fund for workers.

He said these companies had expressed an interest in adopting CDC – an approach that involves greater risk-sharing between employers and staff, with the potential for higher retirement incomes.

A meeting of the Department for Work and Pensions’ working group on the matter recently took place, the group has now given the department its final recommendations.

Barry Parr, co-chair of the Association of Member-Nominated Trustees and member of the panel, said the gathering was “constructive” and suggested it had been looking at the collective arrangements in Sweden as one possible option.

But he acknowledged implementing CDC was not an attractive prospect for most employers and questioned why companies would still want to run their own schemes.

“You can see a move towards things like mastertrusts, for example. But if a mastertrust can offer a quality defined ambition-type of approach then I think it is possible through employee pressure to encourage employers to be interested,” said Parr.

There have been widespread doubts in the industry about whether CDC – part of the government’s defined ambition plans – could be implemented and whether there is enough appetite among employers to drive the approach.

Stefan Lundbergh, head of innovation at fiduciary manager Cardano, recently gave a presentation to the working group on potential collective arrangements from the continent.

Another scheme discussed was the Dutch GP arrangement set up by the doctors themselves, he said.

“The fund members pay a premium to get nominal guarantees and the money that is still not guaranteed – known as ‘risky capital’ – is used to generate a bit of indexation every year. The idea is that when people retire they can benefit from extra income,” Lundbergh said.

A similar system also operates in Sweden, but with a mutual insurance company rather than a pension fund.

“[The Dutch] have created a pension fund, which runs in a sustainable way, in a collective principle,” he said, adding it was “not a fantasy” for a similar arrangement to be brought to the UK.

The main problem was not in implementing the new system itself, but finding an entity, such as a not-for-profit organisation or agency, to get the ball rolling. Once that happens, the plans would gather pace, said Lundbergh.

But even if a small group of larger firms were enthusiastic about the idea, there would still be major challenges, said Neil Carberry, director for employment and skills at the Confederation of British Industry.

“You are still talking about a minority of firms, and the vast majority of saving will be done in DC – it is important that we focus on the quality of DC effectiveness,” he said.

Creating a permissive regime was crucial, so that employers have the freedom to implement their own structures, Carberry added.

The DWP is expected to publish its final proposals on defined ambition later this year, which it is hoped will address some of the grey areas in CDC.

Francois Barker, head of pensions at Eversheds, said: “The main question marks over CDC are whether the prospect of pensions in payment being reduced is culturally acceptable, and the legislative amendments that would be needed to bring it about.”