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Collective DC in UK would require 'radical' legislative changes

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  • Collective DC in UK would require 'radical' legislative changes

UK – Launching a collective defined contribution (CDC) system in the UK would only be possible with "radical" legislative change unless employers can be convinced to take on risk voluntarily, a senior consultant at Towers Watson has suggested.

Speaking with IPE after pensions minister Steve Webb outlined the potential benefits of larger-scale collective DC funds and guarantees in an interview with the Financial Times, David Robbins worried that policies were "informed by the sorts of comments people make in radio phone-ins", raising concerns about investment losses.

However, Robbins added that, simply because Webb had been discussing the potential for CDC arrangements did not mean it would result in the introduction of investment risk-sharing for members across funds.

"I'm not sure what the stick is that you would get people to do this with because, the way the legislation is structured, employers have got a duty to auto-enrol into pension schemes and maintain the membership of those pension schemes – that can be a pure DC scheme," he said.

"Unless you are talking about very radical change in legislation, which I don’t think anybody is," Robbins added, noting the potential exclusion of pure DC from auto-enrolment, "then you rely on employers' appetite to take on some risk themselves or offer some other vehicle."

He also questioned if Webb's use of CDC should be understood to mean he would pursue an exact replica of the Dutch model, whereby risk is shared across the entirety of fund membership.

Robbins suggested the minister could be using collective to describe a multi-employer fund achieving scale.

"You don't need any kind of risk-sharing to do that," he said. "You can have that with conventional DC."

Business lobby CBI suggested the proposals should not cause greater uncertainty for employers.

Neil Carberry, director of employment and skills, said he believed the "vast majority" of pension saving would continue in current DC funds.

"While it is right to look at what could be achieved by more innovative scheme designs, there are still grey areas around how this would actually work, and how risks would be managed," he said.

"It's important businesses have legal certainty over the status and future of these schemes, especially as cross-subsidy between members will mean that, in some years, some savers may have to take a reduction in benefits."

A spokesman for the Department for Work & Pensions (DWP) said Webb's comments came as part of a "wider consideration" of how to counteract the decline of defined benefit funds.

CDC was mentioned in the department's discussion paper on defined ambition last year, alongside a raft of other proposals including the potential for a volatility-smoothing fund for DC savers.

The DWP spokesman confirmed that an update of the paper would be published over the summer, but would only say CDC was one of the models under consideration.

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