The creation of "collective" defined contribution pension schemes, which allow for a sharing of risk that is impossible in conventional DC schemes, would boost pensioner income by nearly 40 percent, according to a report published by the RSA.
Collective Pensions in the UK argues the collective approach, which is commonplace in Denmark and the Netherlands, would dramatically improve retirement income given the decline in defined benefit schemes.
It shows how collective investment can provided 37 percent better returns, because it allows costs to be cut via economies of scale and enables investors to pool their risk.
Written by pension fund manager, David Pitt Watson, the report argues that properly constructed, collective DC schemes are, in fact, already legal in the UK. The report also maintains that collective saving would not leave sponsors being faced with unexpected (and unsupportable) liabilities.
Commenting on the report, head of the RSA Tomorrow's Investor project, David Pitt Watson said:
"The message is clear: united we stand, divided we fall. 6.5 percent of Britain’s GDP is spent each year on private pensions. Properly designed collective pension plans can deliver a 37 percent more productive pension than a typical DC pension. If sponsoring employers are willing to do so, it remains possible to provide much higher collective pensions for most employees of large companies and do so at equal cost. The law, though complex, allows this to happen and I remain convinced those involved in constructing pension provision can find a way forward."
Collective Pensions in the UK also concluded that Collective Defined Contribution schemes:
Are the natural replacement for Britain's DB pension system and remain the best long term solution for preserving adequate pensions while avoiding employers being faced with potentially unsupportable pension liability.
Require good governance and appropriate regulation in order to work, including strong trustee management. Those who establish and run collective pensions must limit the profit they take from them.
Need an adequate number of participants to begin the 'collective' and as such small employers may find less value from the approach.
Savers could boost the size of their pension pots by one third, if the government was to act now to enable collective defined contribution schemes in Britain, an RSA report has found.
The Association of British Insurers (ABI) has pledged to introduce a new set of rules that will tell savers exactly how much of their pensions are being swallowed up by charges on an annual basis.