Should we go Dutch with our pensions?

The Coalition wants to adopt Holland’s pooled system. Would we benefit by taking the plunge?

So-called Dutch pensions are expected to be the cornerstone of radical retirement reforms announced in the Queen’s Speech tomorrow.

The collective schemes have attracted that term not because they share resources, but because they are popular in the Netherlands.

The plans do pool savers’ investments to create mega-funds that aim to meet future pension payouts of scheme members.

There is also the hope that they could help cut back on expensive fund management commission charges, leaving more of savers’ cash to grow in their pension pot. It is claimed that the schemes have the potential to increase members’ pension income by 30 per cent or so.

Pensions Minister Steve Webb is a well-known fan of Collective Defined Contribution (CDC) schemes and has called them “some of the best in the world”. He said: “It is pretty unambiguous that you will get a more certain outcome and potentially a better one.”

Critics disagree. They point out that returns are not guaranteed, with savers only given targets, which may fail to be met. In fact, problems in Holland have led Dutch politicians to call for the schemes to be scrapped in favour of British-style individual pensions.

Pros: It is the certainty of cost that makes CDC pension schemes attractive, say experts.

“CDC plans have held the promise of providing the combination of certainty of cost for the employer along with straightforward access to a retirement income for members,” says Matthew Arends, partner at Aon Hewitt. He predicts that many employers will want to use CDC “as a core part of retirement savings to provide an income in addition to flexible DC cash savings”.

Henry Tapper, founder of the Pension PlayPen, is also a fan. “CDC should be the final piece in the jigsaw that allows those looking for an alternative to annuities, to optimise their pension spending,” he says.

He points out that the idea is not complicated and therefore the schemes themselves need not be confusing, unlike existing pension schemes. “CDC can be integrated into our existing pension framework relatively easily. It is no more than a return to the vision of pensions that existed before the calamities of the past 30 years,” he says.

Former Treasury adviser Ros Altmann welcomes the potential launch of the schemes, but with some reservations. “One has to bear in mind that CDC schemes are not even established yet, they take time to deliver and they do have some disadvantages too,” she says.

“Nevertheless, I think the Government is  right to legislate to permit these schemes as they can be better for employers than traditional Defined Benefit and also better for members than pure defined contribution [DC] schemes. By allowing CDC schemes, the Government is offering employers a less onerous system of promising pensions to their staff.

“The employer will no longer have to carry balance sheet risk from the pension plan, as the contributions are defined and the benefits can be adjusted if necessary.”

Most employers now use DC pension schemes, which produce pension payouts based partly on the amount you put in and partly on how well your investments perform.

The collective nature of the new CDC schemes means the investment risk is shared across potentially millions of savers, cutting down the chance of your pot shrinking.

Danny Wilding, partner at actuary Barnett Waddingham, says the introduction of new rules will mean a need for new types of schemes which can take advantage of them.

“CDC offers a viable alternative to employers who wish to help support staff in retirement, and strikes more of a balance between employee and employer responsibility for pension arrangements,” he says.

Cons: The uncertainty of returns make CDC pension schemes unattractive, say experts.

“The new schemes will allow one generation of member to receive more pension, in the hope that future investment returns will ultimately justify the decision, but that has significant risks involved,” warns Alan Higham, retirement director at Fidelity.

“Younger people may bear the cost in reduced future pensions should these judgments prove flawed and pensioners may see their income fall or, in extremis, see income clawed back.” He also criticised the timing of the announcement given that – as announced in the Budget – people are to be given total freedom to take their full pension fund at retirement from 2015.

“These inter-generational risk-transferring CDC schemes rely on both younger savers staying in and older savers keeping their money invested at retirement,” he says.

“Many people will prefer taking a full lump sum over a short period at retirement, which makes running these schemes challenging.”

Tom McPhail, head of pensions research at Hargreaves Lansdown says there used to be collectivised pensions in the UK, but they were called with-profits funds.

“Investors now shun these investments because of their complexity, lack of transparency and poor management,” he says.

“The big problem is that CDC schemes are based on collective risk-sharing, with individual interests subordinated in pursuit of better overall returns for all. They work very like with-profits funds with actuaries using their skill and judgment to share returns across members and across generations of members.

He also believes the schemes probably won’t be subject to the newly announced pensions charge cap of 0.75 per cent, which could leave members facing heavy additional premiums to cover the cost of hedging the fund investments

Richard Jones, managing director of Punter Southall Transaction Services, warns that in times of extreme distress pensions can actually be cut.  “CDC schemes are common in the Netherlands but have become increasingly unpopular as recent poor investment experience has led to the suspension of annual increases for many years and for some schemes to have had to cut benefits,” he says.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Books should be for everyone, says Els, 8. Publisher Scholastic now agrees
booksAn eight-year-old saw a pirate book was ‘for boys’ and took on the publishers
Life and Style
Mary Beard received abuse after speaking positively on 'Question Time' about immigrant workers: 'When people say ridiculous, untrue and hurtful things, then I think you should call them out'
Life and Style
Most mail-order brides are thought to come from Thailand, the Philippines and Romania
Life and Style
Margaret Thatcher, with her director of publicity Sir Gordon Reece, who helped her and the Tory Party to victory in 1979
voicesThe subject is being celebrated by the V&A museum, triggering some happy memories for former PR man DJ Taylor
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions