The Queen's Speech – Collective DC is a bridge too far
Schroders' Head of Defined Contribution, Stephen Bowles (pictured), comments on the Queen's speech…
We welcome the increased focus on defined contribution (DC) pensions in today’s Queen’s speech. However, we wonder whether the introduction of rules to allow collective DC arrangements in the UK is a bridge too far for employers and the pensions industry? It comes on the back of a wave of pensions legislation in recent years, including auto enrolment, the liberalisation of post-retirement options in the Budget and the capping of charges. These fundamental changes are already stretching all those involved in providing workplace pensions. The industry may now struggle to effectively implement collective DC (CDC), which is a completely new concept for the UK.
Quite apart from the impact on a market already in flux, there are also many well documented flaws with CDC that are yet to be addressed. They include questions of fairness across the generations, whether risks are properly managed and whether CDC can work effectively against the background of the UK’s ageing population and shrinking workforce. CDC also appears to be fundamentally at odds with the Government’s recent moves to allow complete flexibility at retirement, given that CDC schemes are specifically designed to provide a retirement income. To be consistent with the Budget’s removal of the requirement to purchase an annuity, members of CDC schemes would have to be given the option of taking their benefits as cash. This raises the question of how such a cash amount would be calculated – how would the collective DC pot be carved up?
One advantage of CDCs is that economies of scale could lead to lower charges. Lower charges are generally a good thing for DC members, but they are not exclusive to CDC. Many large DC schemes already have charges which can more than match those under CDC arrangements. And where DC charges are higher than the Government believes is acceptable, the proposed charge cap is already waiting in the wings to address the issue. By announcing the cap on charges from April 2015, it appears that the Government has removed one of its own arguments for CDC.
Against the background of auto-enrolment and the removal of the requirement to purchase an annuity, the announcement on CDC seems at best inconsistent with other pension policy, and at worst as another layer of complication in an already overcomplicated industry. We doubt whether employers – not to mention employees – attempting to get to grips with auto-enrolment, charge caps, face-to-face guidance and the removal of the requirement to purchase an annuity will have the capacity (or desire) to deal with yet another pensions initiative.
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