The Queen's Speech heralded a number of reforms to the pensions market in the UK and the industry's reaction on the legislation has been mixed.
As many in the industry have already expressed their views concerning annuities, which were already announced in the Budget, the views expressed here specifically focus on the introduction of collective defined contribution (CDC) that was announced during the Queen's Speech and is due to be implemented in 2016.
Joanne Segars, the National Association of Pension Funds (NAPF) chief executive, said that she "welcomed" the introduction of CDC in the UK.
She said: "CDC schemes potentially offer employers increased flexibility and choice in how they can structure pension schemes to benefit members by providing pooled risk, smoothing, and greater certainty."
Segars added: "The real goal here has to be schemes operating at scale. Scale is a necessary precondition for CDC but it also enables a much wider range of member benefits.
"As a result of auto-enrolment we are already seeing the emergence of large pension schemes in the form of master trusts, which are able to offer their members high quality investment strategies and great value for money."
Norton Rose Fulbright pensions partner Lesley Browning said: "We are experiencing some of the most significant changes to hit the pensions industry in recent years. With defined contribution (DC) pensions now very much centre stage following the increased focus on governance and the March 2014 Budget (which took the industry by surprise), a collective structure which may reduce administration costs will be welcome.
"However, under a collective scheme a member may (if the Dutch system is copied) receive a targeted level of benefit rather than a guaranteed level delivered via an annuity. This may mean that collective schemes will not have the take up the Government anticipates, and may be unpopular with members, employers and unions. It will be essential to ensure that participants appreciate that their retirement income has the potential to go down as well as up."
Browning also noted that recent poor investment returns in the Netherlands have caused politicians over there to consider abandoning the collective system in favour of British-style individual DC pensions.
She added: "Whilst defined ambition may have slid off the coalition's political agenda, increased flexibility and new structures are to be welcomed."
TISA operations director Carol Knight said: "We applaud the increased focus on savings for retirement. Giving people more choice in how they save, complementing the recently announced increased freedoms regarding the options at retirement, is a positive step towards ensuring that people build up a pension pot sufficient to meet their needs."
Barnett Waddingham partner Danny Wilding said: "It's very welcome news that CDC will now be given the legislative framework it needs to become a realistic option in the UK. CDC may not be right for everybody but it cannot be a bad thing that the Government is preparing the legislative foundations for it to at least become an option for pension provision.
"As a result of the proposals in this year's Budget, for many people DC schemes will now operate purely as a retirement savings account, whilst the likelihood of employers opening new defined benefit (DB) schemes is slim. CDC has the potential to offer more generous and stable pension returns to scheme members and act as a viable alternative to both DC and DB schemes. The key benefit of CDC is that it strikes a more balanced share of responsibility for retirement saving between both the employer and the employee."
Partnership head of product development Mark Stoppard said: "Over the last few years, the UK pensions market has undergone arguably some of the biggest changes in its history – with today's announcement adding further diversity to the mix. This move is to be welcomed as it demonstrates further innovation and a genuine commitment to providing better consumer outcomes.
"However, we need to ensure that rather than simply copying the Dutch model, we recognise the UK market poses different challenges and consider how we can learn from their mistakes."
He added: "As usual, the devil will be in the detail and we await further information as to how these product might operate in the UK market."
Liberty SIPP director John Fox said: "Few would have predicted that the two most talked-about bills in this parliament's final year would be about pensions. Together this pensions double-whammy has the potential to be nothing less than revolutionary. But the government's latest proposal - the creation of Dutch-style collective defined contribution schemes - is far from a panacea.
"The prospect of lower fees and potentially higher returns for savers is welcome, but the complexity of such CDC schemes means people may find it difficult to transfer out of them when they change jobs.
"There's also a danger that CDC will be seen as a sop to the life companies that are still reeling after the reforms announced in the Budget. They will be sure to promote CDC schemes hard - as they play to their strengths. But they will face an uphill battle convincing employers to sign up, as all but the largest companies may be put off by the complexity and could resent the need for more changes so soon after getting to grips with auto-enrolment."
CBI deputy director-general Katja Hall said: "We welcome the Government's aims to boost choice and flexibility in the pensions market and CDC schemes will play a part in this. These schemes are complex, so they are likely to be offered only by a few large employers keen to provide their employees with something more predictable than existing DC schemes.
"They have the potential to deliver more for savers – but equally they need to understand that even in retirement their pots could decrease because there are no individual controls over how pensions are drawn down. That's why businesses need to explain clearly the terms to employees."
Capita Employee Benefits head of DC consulting Gary Smith said: "This latest change to the pensions landscape will likely be welcomed by savers due to the promise of greater protection and guarantees for pension pots.
"However, collective saving could be only the start – the pensions industry may wish to consider taking the same principle of people contributing collectively for a better retirement and applying it to annuities.
"Although the 2014 Budget now offers DC savers far greater flexibility about how they take their pension pot, the lump sum at retirement will not be right for all. Many people will still want a secure income and as such annuities will continue to be an attractive choice."
State Street Global Advisors head of UK DC Nigel Aston said: "We cautiously welcome CDC as a potential way to help boost levels of employee engagement thanks to better predictability of outcomes. However, we believe this should also be possible through the proposed post-budget DC framework.
"It is important that the potential promise of CDC doesn't delay trustees and schemes from improving their current plans in the hope of better things to come. The investment industry has a critical role to play here, ensuring that it builds better solutions that give members the confidence to stay on course with their retirement savings."
Towers Watson senior DC consultant Will Aitken said: "CDC is sometimes presented as a magic wand that can make everyone better off in retirement but the Government has never been convinced of that.
"Instead, it hopes that CDC can make pensions less of a lottery, rather than making them bigger on average. That's a worthwhile aim, but CDC will only succeed if people trust the black box that adjusts the value of their savings up or down. Unless employers believe they will, they won't set up CDC schemes."
He added: "It looks as though the Government has abandoned plans to preserve a slither of defined benefit pension provision in the private sector by giving employers more choice over what benefits they promise in future. We're disappointed by this – employers who are prepared to take some risk off employees' shoulders should not have obstacles put in their way."
The news on the introduction of CDC was not positively received by all within the pensions industry, though.
Aegon UK regulatory strategy manager Kate Smith said: "At first glance it looks like this is a case of two steps forward one step back for pension reform.
"The 2014 Budget has given individuals more flexibility about how they take their pension – whether as an income or lump sum once they reach age 55, under the Dutch CDC model there are no such flexibilities. People can only receive their pension at the time and in the format set out in the scheme rules leaving them little room for manoeuvre. Getting the UK ready for retirement needs simple, reassuring and digital solutions not more complexity.
"The scheme does have its merits. The collective buying power would offer benefits through economies of scale and could provide higher investment returns than personal pensions, but the move doesn't reflect trends in UK society."
On collective pension schemes, JLT Employee Benefits CEO Mark Wood said: "Defined ambition is a difficult concept. While investment returns and life expectancy conform with expectations, the system brings some benefit. Outside these norms, as we have seen in Holland, the system breaks down.
"DB pensions depend on the corporate sponsor's covenant but for the majority have proved reliable. Annuities protect the individual from investment risk and living longer than expected. Defined ambition gives no such guarantee."
Broadstone Corporate Benefits director Simon Nicol said: "On top of the myriad of pension changes still facing employers they will not thank the Government for throwing this unexpected curve ball.
"It is difficult to see many employers being enthused about introducing yet another and unfamiliar pension arrangement. If the basic aim of these proposals is to get people saving this added complication from the Government could well end up being counterproductive."
First published 04.06.2014
monique_simpson@wilmington.co.uk
