Government abandons collective pensions hitting thousands of savers in the pocket warns RSA

The Minister of State for Pensions, Baroness Altmann, is set to announce a U-turn in pensions policy saying that “now is not the right time” to push ahead with secondary legislation that would introduce Collective (or CDC) Pensions to Britain.

The RSA think tank warns that a failure to do so, will hit thousands of consumers in the pocket, and deny the same pension freedom to British citizens that is enjoyed in Denmark and Holland—reckoned to be the best pension systems in Europe.

Despite introducing primary legislation that would enable the creation of collective pensions in the UK – the government has now decided to abandon its plans.

According to RSA research the creation of collective defined contribution pension schemes, which allow for a sharing of risk that is impossible in conventional DC schemes, would not only produce a more predictable pension, it would boost pensioner income by 30-40%.

The collective approach, would dramatically improve retirement income given the decline in defined benefit schemes, the RSA has argued, because it allows costs to be cut via economies of scale and enables investors to pool their risk.

This structure is the backbone of private pension provision in Holland and Denmark, both reckoned to have the best pension systems in Europe. However, the law prevents their establishment in Britain.

Since 2007, the RSA has campaigned both to reduce the cost charged by pension funds, and to allow collective pensions in Britain. The RSA has noted that in the private sector, “defined benefit” (DB) pensions, (where people know the retirement income they will get), have been closed, and replaced with private saving schemes, known as DC pensions.

These offer a low and unpredictable retirement income, the RSA said. In response, following the June 2014 Queen’s speech, the government passed enabling legislation, allowing it to create a framework for collective pensions. This passed through parliament with full cross-party agreement last year. However, since the election the government has taken no action.

The RSA said that whilst the government introduced so-called “pension freedoms” (meaning we can spend our pension savings in any way we feel appropriate—even “buy a Lamborghini if we so choose) what we can’t do is to buy a low cost pension - that is an income that will be there for the rest of our lives, because of regulation which prevents their being established.

Collective pensions solve that problem, the RSA believes. And until they are made legal, with appropriate legislation to make them safe, we can expect a continuing transfer of wealth from those who have saved for their retirement to those who can advise them to invest their savings in loosely regulated “income drawdown” and other inefficient pension vehicles.

David Pitt-Watson, who leads the RSA’s Tomorrow’s Investor programme said,

“Abandoning plans to introduce collective pensions to the UK is a terrible decision that will prevent British consumers from enjoying a proper income in retirement. Rather than offer the next generation a safe and productive way to provide for retirement, the government has chosen a path leading to more poor products that deliver poor outcomes.”

The 2013 RSA report, Collective Pensions in the UK II, which was supported by the CBI, TUC, NAPF and AMMT, concluded that UK regulation has resulted in individual defined contribution schemes becoming the norm, with savers suffering as a result.

It warned that DB pensions are ‘withering away’ and that a new framework was urgently needed if people are to enjoy a good standard of living in retirement. The report said that the DWP must take immediate steps to enable collective pensions in Britain, or our retirement system will become little more than a ‘tax advantaged private savings plan’.

Examining how collective pensions have performed over the past 57 years, the RSA’s Tomorrow’s Investor project found that collective saving would have given UK investors a 33% better outcome, and a more predictable outcome than saving as an individual.

Collective pensions are commonplace in Denmark, the Netherlands, and parts of North America. Given that we spend 6.5% of our GDP annually on private pensions, the move from individual to collective saving would have a considerable positive impact on national welfare, equivalent up to 2% increase in GDP, the report found. The RSA’s also concluded that Collective Defined Contribution schemes:

• Are a critical element in allowing “pension freedoms” to work. Without collective solutions it is difficult to see how low cost pensions can be provided which will last for the saver’s lifetime.
• 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.
• Can help support investment in UK infrastructure through the increased investment in illiquid assets that collective pensions allows.
• 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.

Notes to editors

1. To find out more contact RSA Head of Media Luke Robinson on luke.robinson@rsa.org.uk or call 020 7451 6893 or 07799 737 970