Collective individual defined contribution (CIDC) schemes should be sought as the next form of pension provision, a university paper has recommended.
Although collective defined contribution (CDC) has been touted as the potential middle ground between, and replacement of, expensive defined benefit (DB) provision and inadequate defined contribution (DC) schemes, it does not allow for much individual risk management, the University of Utrecht said.
In the paper, written for the Pensions Institute, professors Hans van Meerten and Elmar Schmidt said the more individual nature of CIDC, where pots are segregated within a pooled investment vehicle, allows for better identification of savers' individual pots.
The paper, titled The Legal Differences between CIDC and CDC, drew on experience of CDC in the Netherlands and found that, although it allows for risk-sharing, CDC cannot be tailored to take into account the risk of individuals' needs.
For example, it cannot identify individual pots, and also poses intergenerational issues where older workers are subsidised by younger workers' contributions as premiums are defined and fixed.
In contrast, CIDC, the report said, allows for clear definition of pots, individualisation of risk management, and actuarially fair benefits, while also pooling risk and investments, allowing for economies of scale.
The report said: "The more individual nature of CIDC schemes not only makes the identification of a scheme member's pension easier, it also allows for more individualised risk management and appears to afford more scope for personal freedom of choice."
However, lump sum payments under Freedom and Choice would have to be banned, the report said, as otherwise this "would mean not only an end to risk-sharing in the pay-out phase, but it seems to be contrary to the idea of a CIDC scheme (and indeed a CDC scheme)" making the ‘C' redundant.
Commenting on the report, Cass Business School professor David Blake said CIDC schemes had a clear advantage.
"In the Netherlands, as in the UK, a discussion questioning the sustainability and complexity of DB schemes and their pension promises is taking place, and it is useful for us to learn from their experience," he said.
"CIDC schemes do have an advantage - they maintain individual accounts and are better able to deal with sudden cash withdrawals than CDC schemes, yet are still able to exploit economies of scale to the full which lowers costs through, for example, automatic enrolment and the pooling of investment and longevity risks."
The report comes as Royal Mail reached an agreement with its workers and unions to seek to establish a CDC scheme as soon as legislation permits. The company is understood to be lobbying the government to make the necessary changes in law, which may not require full primary legislation.
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