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​UK should focus on flexible DB over collective DC, Mercer says

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The UK government should focus on offering defined benefit (DB) pension funds greater flexibility over the time-consuming launch of collective defined contribution (CDC) schemes, Mercer has said.

While admitting that any reform proposals need to be mindful of “placing all the financial risk” on either a company or employees, the consultancy’s head of DC Brian Henderson stressed that any plans to introduce guarantees into DC would come at a cost.

“Essentially,” he said, “a good pension is far more about how much more money can be saved and where that money gets invested rather than simply providing expensive guarantees or risk sharing.”

Commenting on the Department for Work & Pensions (DWP) consultation paper on the shape of defined ambition (DA) pension schemes – which last year outlined how greater elements of risk-sharing could be introduced into DC pensions – the consultancy called for a focus on simplified DB provision.

It backed a previous suggestion by pensions minister Steve Webb that indexation could fall away on any future DB accrual in the wake of reforms to the state pension, and said that the government should introduce a statutory override to allow plan sponsors to introduce it and other changes, including the removal of survivors’ benefits.

Glyn Bradley, a consultant at Mercer, added that, while the proposed introduction of CDC is an “appealing ‘third way’ alternative” to existing DB or DC schemes, launching such a pension plan would be a time-consuming undertaking.

“A more sensible priority would be to give existing DB schemes more flexibility by addressing some of the current restrictions,” he said.

“CDCs are very successful when market conditions and membership are favourable, but overseas experience demonstrates that difficult funding problems can occur when they are least able to cope.”

He also noted that some of the “perceived advantages” of CDC could be achieved in the UK if existing legislation were only slightly amended.

“The issue is more about trustees and sponsors stepping forward to adopt them,” he said.

However, there is little consensus within the industry over CDC.

Rival consultancy Aon Hewitt previously argued in favour of collective vehicles, while Barnett Waddingham also suggested the changes would not lead to a “massive” additional legislative burden.

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