Lack of appropriate legislation might be slowing the uptake of collective defined contribution plans in the U.K., but adding to speculation over the structure's viability is the failure of CDC elsewhere in Europe.
In the Netherlands, which was the birthplace of CDC arrangements, these plans now are expected to be converted into pure DC plans as they failed to deliver intergenerational fairness, sources said. Generational equality wasn't achieved by the Dutch plans because older participants' benefits were drawn at the expense of younger participants' benefits, the sources said.
But Simon Eagle, consultant at Willis Towers Watson PLC in London, said the U.K. approach to CDC is different from the Dutch model. In the Netherlands, the government in 2005 compelled plan sponsors to convert existing DB plans into collective DC arrangements when liabilities increased to four times the company's enterprise value. Under the U.K. proposal, Mr. Eagle said, companies would not be converting DB funds into CDC plans. Instead, they will be freezing the DB plans and opening a CDC plan that will begin to accrue benefits from scratch.
Steven Taylor, partner at Lane Clark & Peacock LLP in London, noted the CDC legislation will not help companies with closed DB funds that have funding deficits: "Those deficits will still need to be met by employer contributions as they are at present."
"This means the U.K. design is less constrained than those already existing overseas," Mr. Eagle said.
Martijn Vos, managing director, pension and insurance, at consulting firm Ortec Finance, thinks "CDC, with a fixed contribution, is better (off) in an increasing rates environment (like in the U.K) and it is useful for (participants) who are 10 to 15 years before retirement," compared to the Netherlands, where CDC was introduced in a period of declining interest rates.