The global shift towards collective defined contribution (CDC) has gathered momentum after the UK government announced its intention to remove legal impediments to their set up last week.
In March, Unisuper asked the Financial System Inquiry to consider how the best features of pension systems in the Netherlands and Canada could be emulated in Australia, as a means of reducing the sequencing risk for members.
Unisuper is exploring the possibility of offering CDC to its members and its chief executive Kevin O’Sullivan has told IM he is watching the developments in the UK with interest.
Under the UK proposals any employer or provider setting up a such a scheme will have the right to alter the level of benefit according to investment outcomes, and any indicated likely future benefits will not constitute a legal right to that benefit for members.
Unlike ordinary defined contribution schemes, members in CDC scheme are given a targeted return based on their contributions, rather than ownership of a set amount of money. Returns are smoothed to give members greater certainty of outcome, but the main attraction for many is the way reduced administration costs are passed back to members in higher payouts. Proponents of CDC in the UK, estimate that its returns could be between 39 per cent and 50 per cent higher than ordinary DC schemes.
Pauline Vamos, chief executive of ASFA, favours CDC as a means of avoiding the limits on investment created by the 30-day access to members rule.
“One of the impediments to long term investing in Australia is the fact that you have got your 30-day access and so very little money is sticky,” she said. “If you can start investing when you know your time horizon, it really increases your ability to invest in long-term infrastructure, long-term property and that is how you get that illiquidity premium into your portfolio. So we think it is an important conversation to have now.”
David Knox, senior partner at Mercer, believes the concept of pooling is attractive, but is aware of the practical difficulties of implementation.
“Conceptually, they are certainly worth looking at, but with pooling it means inevitably there will be some winners and losers,” he said. “With SGC people have grown up thinking that is their money and they are going to do what they want with it, whereas a collective DC needs that concept to be loosened a little bit.”
Tom Garcia, chief executive of the Australian Institute of Superannuation Trustees, saw the benefit of a change in the law to make CDC attractive as offering schemes greater choice in what they offer to members, but he was less sure of its worth.
“Collective pension schemes are a half-way house for DB providers who need to share risk between employers and employees,” he said. “So, it’s easy to see why they are gaining support in some countries where DB schemes rule. The pressures on Australian super funds are predominantly DC and so it is less clear whether collective pensions are the appropriate solution to providing more retirement income certainty and less volatility.”
In the UK reaction to the government’s announcement has also been mixed.
Trade unions have welcomed the move with Frances O’Grady, general secretary of the Trade Union Congress stating: “The pooling and risk sharing in Dutch-style not-for-profit pensions offer a better and more predictable retirement income.”
Leading pension fund organisation, the National Association of Pension Funds, welcomed the move for offering employers more flexibility in how they structure schemes.
A leading London based pensions lawyer, Lesley Browning of Norton Rose Fulbright, said communicating CDC benefits was risky. “It will be essential to ensure that participants appreciate that their retirement income has the potential to go down as well as up.”
The actuarial arm of PwC in the UK was sceptical of take-up
Peter McDonald, pensions partner at PwC, said employers would need much assurance that future governments would not keep changing the rules once schemes are in place and justifying why employers should change their pension arrangements again.
He added: “The Dutch experience shows that for collective schemes to be successful they need to be seen to operate fairly between generations. There is no free lunch on the current high cost of securing certain income for those in retirement. Any type of collective scheme that transfers this high cost, or any potential shortfalls in the fund, exclusively to younger generations of members will be viewed with suspicion.”