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Risks in pension changes must not be ignored

Last summer, hundreds of thousands of Dutch pensioners were told that their pension payments were being cut.

Due to funding deficits, members of dozens of the country's widely admired Collective Defined Contribution (CDC) schemes learned their regular payments would fall by an average of 1.9%. Some claim hundreds of thousands more in the Netherlands will face cuts this year.

These are not real-terms cuts, caused by the failure of pensions to keep pace with the rising cost of living. The pensions are actually going down.

That is the downside to weigh against the attractions of the Dutch model. This element of risk has so far prevented successive UK governments from copying the approach.

But the benefits have apparently persuaded ministers that the time is ripe to experiment with CDC plans.

Unlike the individual defined contribution (IDC) schemes at present most popular and widespread in the UK, the Dutch model sees people investing in collective retirement schemes, dependent for the pension payments they later receive on the performance of managed funds.

The advantage, according to Pensions Minister Steve Webb, is that retirement incomes can be boosted by up to 30% compared with standard UK schemes. The risk is that they may not perform according to expectations, leaving schemes underfunded.

But ministers seem to have decided that the potential gain, including savings on administration charges, is so great that it will offset any risk.

Indeed, the hope of a 30% better return could convince many people. But it would be useful to see more data demonstrating that CDC schemes really are some of the best schemes in Europe, as Mr Webb claims.

Meanwhile, those already at pension age will also be offered the chance to top up payments into their own scheme, to boost the amount they eventually receive.

This is an attractive idea, though only the better off will be able to take advantage.

With proposals for legislation to enable both changes expected to be in the next Queen's Speech, it is important ministers provide evidence for their claims. Critics suggest the calculations behind hopes that CDC can offer a 30% better return are far from robust.

They rely on optimistic views of the benefit of a less conservative investment model as the size of the fund enables fund managers to invest more aggressively.

Lord Hutton, former Labour pensions minister and an outspoken critic of the CDC approach, says we should instead improve existing IDC schemes, to ensure there is less risk of a shortfall when people come to retire.

There would certainly be benefits in re-establishing the link between savings and retirement income in the mind of the public. Too many people have lost the savings habit.

But years of low returns and high fees have left people suspicious of all aspects of the pensions industry.

As well as evidence, Coalition ministers should improve transparency, so members of pension schemes can find out how their money is being invested, whether in traditional or new models of pension.

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