On Wednesday in the Queen's Speech before Parliament, UK ministers will herald a move towards a new workplace pension arrangement. The idea is for 'collective defined contribution' pensions, or CDCs, which the government believes could boost pension returns by up to 39%. Such a plan might have hundreds of thousands of members, all of them pooling their regular pension contributions, giving the 'mega-fund' managers far more clout than they have with individual pension arrangements. Denmark and the Netherlands, which already have CDCs, have the lowest levels of pensioner poverty in Europe.
Two things strike me about this proposal.
First, it is a welcome attempt to bring back, in a different form, the highly successful workplace pension plans that the UK used to have before they were taxed and regulated out of existence by former Chancellor of the Exchequer Gordon Brown. Before 1997, huge numbers of employees put part of their salary in workplace pension plans, in return for a defined benefit – normally two-thirds of their final salary. It was a huge success, and the UK private pension sector became larger than that of every other European country put together. But seemingly insignificant changes to 'advance corporation tax' in Brown's 1997 Budget took billions of pounds out of such pension investments each year. Then, much strict solvency regulations – far too strict, in fact, and infinitely stricter than the rules on the government's own, bankrupt, state pension system – led to the closure of plan after plan.
So my first reflection is, if the UK is going to revive this successful idea of workplace pensions, but on a defined-contribution rather than defined-benefit basis, then it needs to armour them against future tax raids and over-regulation.
The second is that there needs to be proper competition between these new mega-funds. Right now, ministers are unclear on that. The pensions minister, Steve Webb MP, has talked about the pensions industry setting up 'the' collective scheme, with the government providing the regulatory framework, and possibly even providing some kind of ultimate guarantee. But while a single collective could provide a great deal of investment clout, it would suffer from the same problems as every monopoly – sloth, bureaucracy, no comparisons on which its success or failure can be measured, leading to bad value for customers.
The right model for CDCs has been around since the early 1990s. Indeed, we reviewed it in the Adam Smith Institute report Singapore Versus Chile back in 1996.It is the Chilean model, now adopted by dozens of countries across the world. In this model, there are many, competing pension funds. Workers may make contributions into whichever they choose, and indeed switch their contributions from one to the other. There is regular reporting, so that contributors can see how their particular fund is reporting. When they retire, their invested savings provide their retirement income.
The popularity of the old workplace defined benefit plans suggests that the new collective defined contribution plans could be highly popular too. But they need to be both competitive and secure from the ravages of future politicians and regulators.