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Pensions system could be going Dutch

Pensions system could be going Dutch

Category: Pensions

Updated: 27/01/2014
First Published: 27/01/2014

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Another pensions reform set to be considered, and perhaps the more radical of the bunch, the Government has announced its plans to implement new measures that will see so-called collective defined contribution schemes become widely available – much like they are in the Netherlands.

In collective schemes, workers pool their pension savings into a collective pot rather than an individual one. They share the risks of investment with others in the scheme, while the level of income during retirement is generated on the basis of market fluctuations.

There's no need to cash in contributions and buy an annuity on retirement – instead, the cash can remain in the pot so retirees can benefit from longer-term investments.

Critics argue that collective schemes are a lot riskier than existing schemes as workers aren't given a guaranteed income, with it instead varying on the performance of underlying investments, and there's also the risk that younger workers could take an unfair share of the hit if the markets went the wrong way.

However, there are a lot of supporters of such schemes, who argue they're better value for money and can reduce administration charges. Collective pensions could deliver returns that are up to 30% higher than those currently generated, while the size of the schemes (in some cases covering entire industries) even out the risks and make returns more predictable.

Ministers have reassured critics that they'll be building additional safeguards into the process to make such schemes more acceptable. It's thought to have the backing of unions and is expected to form a centrepiece of a proposed Pensions Bill likely to be included in the next Queen's Speech.

"Some of the best pension schemes in the world are run on a collective defined contribution basis. I would like to see British workers have access to schemes run on this basis," said pensions minister Steve Webb.

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