Experience shows that the benefits of intergenerational solidarity and collective pension risk sharing are often not appreciated, particularly by those who feel they are shouldering a greater share of the burden than they ought. The rise of political parties representing the ‘grey’ vote shows that the senior electorate is also keen to protect its financial interests.
As the Netherlands engages in a national pensions debate this autumn, a key focus will be the balance between old-style collectivity and the desire for younger generations to take greater responsibility for their financial future. For the young, individual accounts of some form provide a sense of ownership that old-style collective schemes do not, particularly at a time when employment relations are becoming shorter-term and trade union membership is dwindling. Old-style industry-wide DB seems like a relic to many.
It is somewhat ironic that the UK is belatedly introducing greater flexibility in risk sharing through defined ambition pensions when the Netherlands is talking (at least) about loosening the ties that underpin the old collective frameworks.
The UK government is currently seeking to put together a framework for defined ambition and collective DC. For some, defined ambition looks like a return to the flexibilities of DB before successive governments imposed increasingly onerous requirements on accrual and cost-of-living increases. Collective DC could take a number of forms but it remains unclear how much demand there will be for these structures.
It is good that the government is seeking to foster innovation in pensions and this is down to the vision and tenacity of Steve Webb, whose five-year tenure as pensions minister will most likely end next year.
What can the UK learn from the rest of Europe on collective DC? Dutch, German and Italian doctors, dentists and other professionals have unwittingly served as lab rats for many years because they have shared pension risk either voluntarily or through a state sponsored framework.
These funds have the simplicity of a single collective investment pool but, since there is by definition no sponsor, members must bear any financial burdens through the means of increased contributions or lower accrual rates. Some funds target a fixed annual accrual rate in euro terms and vary the premium necessary to achieve this.
Common to many of these schemes is a strong focus on the groups they serve since these individuals are at the same time members, sponsors and customers. Intergenerational conflicts could destroy these schemes, so they must be honest, transparent and open about the challenges that they face. As such they deserve close scrutiny.