Hunt: 'Countries like Australia and Canada have found a way of making sure that they get better returns'
Jeremy Hunt's ambitious proposal to adopt a pension system akin to Canada's has raised concerns in the pensions industry, as experts warn that it may not adequately bolster retirees' income.
The Chancellor had been advocating for the expansion of collective defined contribution (CDC) schemes, which resemble pension systems found in the Netherlands, Australia, and Canada.
These CDC schemes offer a middle ground between present-day pension funds and traditional final salary schemes. Both employers and employees contribute to a shared fund, which later provides retirement income.
Unlike defined benefit schemes, where income is guaranteed, CDC schemes distribute longevity and investment risk across all contributors. This approach contrasts with the current defined contribution pension pots, in which individual workers bear the full investment risk.
The Royal Mail is poised to introduce a new pension scheme based on this hybrid model, with 150,000 employees set to enroll next year.
The government had initially suggested that individuals in CDC schemes could enjoy retirement incomes up to 22% higher than other pension plans. However, research commissioned by the Association for British Insurers, an industry trade body, suggests that these superior returns may only materialize in old age.
Its model indicates that if a worker starts saving in a CDC scheme at age 30, their retirement income would amount to 51% of their pre-retirement salary by the age of 75. In a typical defined contribution scheme, this figure would be 55%. To match the income provided by conventional pension pots, individuals would need to reach the age of 80 within the CDC scheme.
Yvonne Braun, representing the ABI, argued that the government's projections were based on an "incomplete picture," cautioning that CDC schemes might not necessarily outperform traditional defined contribution pensions.
“There are many ways to deliver both security and flexibility, and no single product will work or be appropriate for everyone,” she said.
Robert Yuille, also from the ABI, stressed that the government should not rely on a single figure, as “in the real world there will be different outcomes in CDC for different people, depending on their age and when they join the scheme.”
Hunt had pledged to revamp pension investment regulations to allow fund managers to invest more in potentially lucrative but riskier assets. He believed that countries like Australia and Canada had achieved better returns by “consolidating their pension fund industry in a way that makes it easier for them to invest in unlisted and potentially higher growth vehicles and that’s the thing I think needs to be worked on.”
In 2022, all three of the UK's largest pension funds underperformed their Canadian and Australian counterparts. This year, the pensions regulator approved Britain's inaugural CDC scheme at Royal Mail, scheduled to launch in 2024 for 150,000 staff members.
