Dutch experience pinpoints tensions between new world of pensions free choice and Steve Webb’s collective dream
Wags have suggested that the easiest way for a government to cover something up is to announce it on a slow day in the House of Commons. Gregg McClymont, Labour’s pensions spokesman, certainly wasn’t expecting many to be watching last week’s committee stage debate on the Pension Schemes Bill.
He was there to cross swords with pensions minister Steve Webb, the architect of new legislation, which is designed to turn the latter’s vision of defined ambition into reality.
Webb said that the end of contracting out in April 2016, which will prompt many employers to review whether they want to continue offering defined benefit pensions, meant that it was important to be able to offer new options. He said: “We are very keen to ensure that there are alternatives available to such employers, so that they do not swing unnecessarily from one extreme to the other.”
“We are very keen to ensure that there are alternatives available to such employers, so that they do not swing unnecessarily from one extreme to the other”
Given opposition support for the bill, the likelihood that it will not be passed must be negligible. McClymont said it was “sensible to try to find something that takes aspects of both those forms of pension schemes and offers something better.”
But just because something is allowed in Parliamentary statute is no guarantee that it will be taken up.
Research published last week by the Pensions Policy Institute (PPI) reinforced concerns that all is not well with collective defined contribution (CDC), the most developed form of the risk-sharing that so appeals to Webb, in its Dutch homeland.
“Just because something is allowed in Parliamentary statute is no guarantee that it will be taken up”
CDC evolved in a highly unionised Dutch economy that looked more like the UK of the 1970s than that of today.
But as the Dutch labour market and pensions system evolves, tensions between individual and collective interests will intensify.
The Netherlands’ Ministry for Employment and Social Affairs has “raised the growing prevalence of self-employment as a key challenge for the Dutch pensions landscape, alongside changes in the labour market that may mean industry-wide pension funds with mandatory participation and limited choice are increasingly less attractive to workers.”
“Industry-wide pension funds with mandatory participation and limited choice are increasingly less attractive to workers”
Self-employment has of course driven much of the post-recession growth in the UK labour market.
As a result, the Dutch pensions system seems to be “edging closer” to the UK’s much more individualised, post-Budget model, according to the PPI.
This will present an issue if and when a member of a CDC scheme wants to cash in their benefits, says the PPI, highlighting a potential mismatch between the ‘nominal’ contract that Dutch CDC schemes offer and what they can redeem by opting out.
The report, which also recognises the benefits of scale that CDC can deliver, recommends that there is “the need for clearly-defined individual property rights at fair market prices in a pensions landscape without mandation and with freedoms for members to stop their contributions, withdraw at retirement, or exit the plan altogether.”
“Just because CDC is developing problems in its Dutch homeland is no reason not to junk the concept”
Just because CDC is developing problems in its Dutch homeland is no reason not to junk the concept though, Webb said in Parliament. He paraphrased ex-prime minister Gordon Brown’s famous soundbite to call for “British CDC schemes for British workers”
Webb once again denied suggestions that there was an inherent contradiction between the objectives of CDC and the Budget pension reforms, which gives scheme members much more control over how they use their retirement savings. But he acknowledged that those running CDC schemes in the UK would need to tailor their proposition around the reforms.
“Members of schemes offering collective benefits will be able to cash out their collective benefits if they wish,” he said, adding that measures to facilitate this will be considered in the future.
Webb also raised the prospect that CDC could also play a role in providing at-retirement benefits. “There is much to be said for being in with other people for potentially a 20-year or 30-year retirement, rather than buying an annuity. We see these two as entirely compatible.”
“Industry feedback consistently suggests that Webb’s optimism about potential take-up of CDC, albeit a noble objective, is overblown”
Webb still insists there is an appetite for a halfway house between DB and defined contribution, claiming it is “clear that employers want new options.”
He pointed to research conducted by the Department for Work and Pensions, which showed that “more than a quarter of employers would be interested in offering a pension involving greater risk sharing between members and employer.” McClymont described this level of appetite as ‘limited”.
Industry feedback consistently suggests that Webb’s optimism about potential take-up of CDC, albeit a noble objective, is overblown. The lessons from across the North Sea also suggest that a vision of pensions developed on the corporatist Continent will have little resonance for savers in the UK’s new world of pensions freedom.