Going Dutch is proving a pension conundrum

undermined the whole system. And it all saw employers take fright at the prospect of long term pension commitment.

The result has seen companies and organisations closing DB schemes – British Airways is the latest seeking to do so.

Figures from the Pension Protection Fund to the end of December show why the trend is continuing.

The aggregate deficit of the around 5,500 DB schemes in the PPF was £103.8 billion, up £16.2 billion on the previous month’s £87.6 billion. There were 3,710 schemes in deficit and 1,878 schemes in surplus.

Business hasn’t turned its back on pensions however, largely converting to DC schemes where employers pay in a set figure and have no responsibility for the ultimate pension outcome. That is down to the performance of the Stock Market. Employees have no guarantees.

CDC schemes, popular in the Netherlands, come somewhere between DB and DC.

The employer pays in a set amount, providing them with much-needed certainty. But from an employee’s point of view, there is a target for what he or she will receive on retirement.

It does not produce an individual “pension pot”, which you then have to decide how best to use for your retirement, but pays out a regular retirement income from the collective fund.

It is claimed CDCs can provide better returns.

A study of CDCs and DC schemes between 1955 and 2011 by consultants Aon Hewitt concluded that those retiring on the average DC scheme received 21 per cent of their previous salaries while those on CDC got 28 per cent. But there have been issues. In 2012 a quarter of the schemes in the Netherlands cut pensions by an average of 1.9 per cent to restore their finances.

Advantages are greater predictability of outcomes for members, members don’t need to be involved with investment decisions, and greater investment efficiency and economies of scale. Disadvantages include – no guarantee that workers retiring will actually receive the target proportion of their salaries while some pension experts believe claims of better returns are exaggerated.

The Pension Schemes Act 2015 contained provision for alternative pension scheme designs including CDCs, but secondary legislation to bring them into effect was never introduced.

For the moment the indications are that the Government isn’t convinced.

Not good news for Royal Mail which last month closed its DB pension fund to future accrual on the basis of an agreement in principle with the Communications Workers Union to create a new CDC. The proposed arrangement will cover the company’s 80,000 DB members as well as its 40,000 DC members, and will combine a cash balance DB scheme with a CDC plan. But will it ever happen? Currently the Royal Mail deal has transitional pension arrangements in place until hopefully the Government finally jumps.

If it doesn’t, plenty of people both in the unions and the pensions industry will be disappointed. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners, based in Solihull. Email: tlaw@eastcotewealth.co.uk The views expressed in this article should not be construed as financial advice