Growing pressure to reform retirement systems because of increasing longevity risks has spurred the launch of new collective defined contribution plans in the U.K. and the Netherlands.
Under the Pension Schemes Act 2021, U.K. plan sponsors will be allowed to launch CDC plans — where participants share longevity and investment risk — for the first time.
The U.K.'s efforts to bring CDC arrangements into the domestic retirement market was influenced by the experience of other countries, including the Netherlands, where CDC plans also are getting an upgrade.
Under a new pension agreement, the entire Dutch market must shift from defined benefit and existing collective defined contribution plans to either new CDC plans or pure DC plans by 2026.
Martijn Vos, chief operating officer at consultant Ortec Finance Ltd., said that both the new U.K. CDC plans and the new Dutch plans will make retirement savings simpler for individuals, compared with pure DC plans.
Not only can CDC plans protect plan participants from the risk of running out of savings but they also reduce the complexity of decisions at retirement — something participants can struggle with.
The Dutch CDC model has some key differences from its U.K. counterpart, however, namely a capital buffer for industrywide plans, Mr. Vos said. The buffer is used to offset benefit cuts in times of market stress.
Conversely, the U.K. plans are not replicas of the existing or new Dutch model, according to U.K. consultants.
Matthew Arends, Aon PLC's head of U.K. retirement policy, said plan sponsors are not going to be converting DB benefits into a CDC income in the U.K. model under the new law, but are planning to launch new CDC plans.
In the U.K., plan sponsors' responsibility is to provide contributions and income for life to participants, while in the Dutch model, there are further obligations on the employer. "Future (U.K.) CDC schemes will retain those two features even if the details of the benefits are different," he said.
Mr. Vos said that in the Netherlands the intention is to transfer existing defined benefit rights to the new collective DC plans, while in the U.K., pension rights stay in the existing plan.
