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.

Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
art
News
Kenny Ireland, pictured in 2010.
peopleActor, from House of Cards and Benidorm, was 68
News
A scene from the video shows students mock rioting
newsEnd-of-year leaver's YouTube film features staging of a playground gun massacre
Travel
travel
PROMOTED VIDEO
Voices
A family sit and enjoy a quiet train journey
voicesForcing us to overhear dull phone conversations is an offensive act, says Simon Kelner
News
i100This Instagram photo does not prove Russian army is in Ukraine
News
Morrissey pictured in 2013
people
Sport
sportVan Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Life and Style
Martha Stewart wrote an opinion column for Time magazine this week titled “Why I Love My Drone”
lifeLifestyle guru Martha Stewart reveals she has flying robot... to take photos of her farm
Arts and Entertainment
The Secret Cinema performance of Back to the Future has been cancelled again
filmReview: Sometimes the immersive experience was so good it blurred the line between fiction and reality
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
i100
Life and Style
The director of Wall-E Andrew Stanton with Angus MacLane's Lego model
gadgetsDesign made in Pixar animator’s spare time could get retail release
News
peopleGuitarist, who played with Aerosmith, Lou Reed and Alice Cooper among others, was 71
Environment
Tyred out: should fair weather cyclists have a separate slow lane?
environmentFormer Labour minister demands 'pootling lanes' for women cyclists
News
people
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

1st Line Support Technician / Application Support

£20000 - £24000 per annum: Harrington Starr: A leading provider of web based m...

Team Secretary - (Client Development/Sales Team) - Wimbledon

£28000 - £32000 per annum: Ashdown Group: Secretary (Sales Team Support) - Mat...

Accountant / Assistant Management Accountant

Competitive (DOE): Guru Careers: We are looking for an Assistant Management Ac...

Senior Investment Accounting Change Manager

£600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

Day In a Page

Dress the Gaza situation up all you like, but the truth hurts

Robert Fisk on Gaza conflict

Dress the situation up all you like, but the truth hurts
Save the tiger: Tiger, tiger burning less brightly as numbers plummet

Tiger, tiger burning less brightly

When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

In grandfather's footsteps

5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

Martha Stewart has flying robot

The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

Do women cyclists need 'pootling lanes'?

Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

A tale of two presidents

George W Bush downs his paintbrush to pen father’s life story
Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

The dining car makes a comeback

Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

Gallery rage

How are institutions tackling the discomfort of overcrowding this summer?
Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

Eye on the prize

Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

Women's rugby

Tamara Taylor adds fuel to the ire in quest to land World Cup
Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

The day America’s love of backyard tigers led to a horrific bloodbath

With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

How Samuel Beckett became a French Resistance spy

As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
We will remember them: relatives still honour those who fought in the Great War

We will remember them

Relatives still honour those who fought in the Great War
Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

Kodak's last-ditch bid to keep celluloid alive

Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

Acting in video games gets a makeover

David Crookes meets two of the genre's most popular voices