Government intentions to legislate for Collective Defined Contribution pension schemes are misplaced and will not see returns distributed fairly, Hargreaves Lansdown warned today.
The firm's warning comes after pensions minister Steve Webb this weekend confirmed that legislation to set up CDCs in the UK would feature in the Queen's speech on Wednesday.
The Dutch-style schemes are expected to come into force by April 2016 and will pool contributions in a collective fund of private sector workers rather than individual accounts. CDC schemes combine longevity pooling with investment successes and failures which are shared across the body of members.
However, Hargreaves Lansdown said Webb’s intentions were good but 'misplaced'.
'With the best will and skill in the world actuaries won't be able to distribute money fairly between generations, between social groups and between individuals,' the firm said.
'In particular, CDC schemes will benefit the affluent, who tend to live longer than low-earning workers. By contrast, the individual pension accounts we currently have in the UK allow individuals to buy enhanced annuities if they are in ill health or have a lower life expectancy.'
The firm also noted that sweeping pension reforms introduced in the March Budget, which will provide retirees with more options on how they draw their pensions, would not be open to those in CDC schemes.
Laith Khalaf, head of corporate research at Hargreaves Lansdown, said: 'CDC is a damp squib. Employers are busy dealing with the huge reforms the government has recently made to the pension system. A CDC scheme will be complicated to explain and won't give workers the freedom at retirement other schemes enjoy; employers are therefore likely to give CDC a stony reception.'
But, ministers believe that some of the best pension schemes in the world are run on a collective basis.
A DWP spokesman said: 'The coalition government's action to date has already started a pension saving revolution in the UK but, as the pensions minister has stated clearly, there is more we can do to continue this drive.
'The government's legislative programme for the final session of the Parliament will be outlined in the Queen's speech this week. A consultation on the future of workplace pensions has been held over recent months and the findings of this will be published soon.'Speaking to The Actuary, actuaries Barnett Waddingham agreed that there would be some challenges with CDC schemes, but said the UK would need to get used to the idea of collectivisation before the industry moved on to think about the more sophisticated target benefit arrangement.
Partner Danny Wilding said: 'There are different levels of risk sharing that CDC schemes can operate and I think it is certainly true that the more risk that you try and share and target benefits so that each member has the same pension formula that then becomes more difficult to manage and then you have all the risks of defined benefit provision that goes along with that.
'When people think about CDC schemes they think about the Dutch-style pension scheme that are almost semi-defined benefits. They have very strong benefit targets that schemes are managed against. To be honest, I'm not sure that the UK would be ready for that on day one. I think if we had the CDC legislation at some point in the next 12 months say, I think the first CDC scheme would be the kind of pool arrangement, more like pooled retirement savings.'