GUEST COMMENT: Time for collective DC

Written by PMI technical consultant Tim Middleton

In its 2016 Pensions Outlook report, published recently, the OECD noted that defined contribution (DC) pensions arrangements are becoming increasingly common throughout the world. With this in mind, it has published a Roadmap for the Good Design of DC Pension Plans, which contains 10 recommendations for ensuring that such schemes are able to provide adequate retirement incomes for members.

The recommendations identify the traditional areas of concern for DC arrangements where improvements are most needed. Individual members bear all investment risk, rely on well-designed default investment strategies and are vulnerable on decumulation either to the volatility of annuity rates or longevity risk if they opt for drawdown.

Curiously, the recommendations stop short of promoting an option that has been shown to address all of the historic vulnerabilities of conventional DC. Denmark and the Netherlands are generally recognised as offering some of the best quality pension systems in the world. Central to those countries’ success is the use of collectivised DC (CDC) schemes. These arrangements achieve effective risk sharing between members and plan sponsor, spare members high-risk decisions during either the accumulation or decumulation phases and provide secure lifetime incomes without the need for annuitisation.

If DC schemes represent the future of pension saving throughout the developed world, it is clear that governments should adopt policies that give citizens the best possible prospects of a comfortable retirement. CDC is an option which has proved successful and which should not be overlooked.

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