EUROPE - Introducing collective defined contribution schemes would not breach European law despite one government citing it as a reason to abandon risk sharing, a lawyer said.
Slaughter and May partner Philip Bennett said collective DC would not breach the Directive of Institutions for Occupational Retirement Provision if it was correctly designed.
Last month the UK's department for work and pensions announced it would take no further action on collective DC because it posed a risk of unacceptable intergenerational unfairness and breaching European legislation.
However, Bennett said there was no risk of breaching the IORP Directive, as long as the shared risk scheme did not provide "guaranteed benefits" to members.
He said: "The government should have persevered with the option as it would have a realistic prospect of being adopted by larger employer groupings and providing a higher level of retirement income.
"If designed correctly the directive will not apply and the risk the DWP is concerned about is not a risk."
Bennett explained the relevant articles in the IORP Directive only apply to require funding standards if the scheme pays a pension at a specified rate until the member dies; guarantees an investment return; or guarantees a given level of benefits.
He said: "Under collective DC you are promised a target pension that looks like a defined benefit but that amount is not guaranteed - it is always readjusted so the liabilities of the pension plan change according to the asset value."
Bennett said collective DC members could guard against benefits dropping in retirement if they bought a guaranteed benefit from an insurance company at their normal retirement date in their own name, or "external annuitisation" outside the scheme.
The member then has the opportunity of benefiting from future pension increases on a non-guaranteed basis in the CDC scheme, with those non-guaranteed increases being bought out annually or every three or five years, said Bennett.
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