It’s not fair to put employers in the middle of George Osborne and Steve Webb’s contest
Auto-enrolment, radically liberalising the at-retirement market, and now defined ambition; this government shows no sign of running out of steam.
Yet its intention to realise its defined ambition agenda by introducing a new type of collective pension scheme in the UK could just be one idea too far.
Collective defined contribution (CDC) was heavily trailed to appear in the Queen’s Speech, but - admittedly unsurprisingly in what is only ever a high level vision of the government’s plans - the Queen did not go so far as to name-check CDC.
One suspects the idea’s long-standing champions will be rather disappointed not to have heard the words coming out of her Majesty’s mouth.
Defined ambition - a ‘third way’ type of pension which is less expensive and demanding than defined benefit, but gives better outcomes than defined contribution - has long been part of Webb’s intended legacy.
Steve Webb was looking for a big idea and this is the one he has come across
Those in the know believe he has decided that collective DC will be the best way to realise his vision. “I think Steve Webb was looking for a big idea and this is the one he has come across,” said Kevin Wesbroom, principal consultant at Aon Hewitt and one of collective DC’s staunchest advocates.
But Webb hadn’t banked on an intervention from George Osborne.
In an imaginative and sweeping set of Budget reforms, the chancellor gave savers control over their pension pots, allowing them to do what they want with their money at the point of retirement. The reform package and its accompanying rhetoric was classically libertarian in its ethos and encourages individual freedom and choice.
Meanwhile, collective DC is a direct move away from giving individuals control.
“Workers would contribute to pooled pensions funds along with potentially thousands of others and in return would be offered a target pension paid directly from the fund (instead of through annuities),” explained David Griffiths and Simon James of law firm Squire Patton Boggs, in a blog for Pensions Insight.
Wesbroom is not convinced that the Budget is a death knell for CDC although admits that his first thought on hearing the Budget was “well, that’s two years’ work down the drain.”
He argues CDC can be adapted to work within the new world.
It’s not fair to put employers in the middle of an ideological tug of war between Steve Webb and George Osborne
“What we see is perhaps employers’ contributions going into [a] collective vehicle, so that gives you your steady income that you’re looking for in retirement. Your contributions, that you’ve paid, can go into your pensions pot and you can play around with those, buy a Lamborghini, do whatever you want to do – take advantage of flexibility.
“So we’re seeing a mixture of the two.”
It’s an interesting idea, but could get rather complicated to implement and administer. Even in its most straightforward form, CDC will take time to introduce and employers, who have already had to overhaul their schemes to comply with auto-enrolment, are likely to be unwilling to sign up to yet another new type of pension scheme.
It’s not fair to put employers in the middle of an ideological tug of war between Steve Webb and George Osborne. For their sake, it’s time to let one cohesive idea win out overall.