Rachel Reeves paves way for Dutch-style pensions (that failed in the Netherlands)

Telegraph

09-05-2025

When Rachel Reeves unveiled plans to let companies raid their own pensions, she was unequivocal about her motivation – and it was not about protecting retirements.
Strict safeguards currently restrict access to defined benefit pension surpluses, but as the Chancellor defiantly pledged to tear them up, she confirmed that growth was the Government's top priority.
Experts called it a £40bn tax grab that puts pensions at risk, while some now fear a repeat of the 1990s Robert Maxwell scandal, but the Chancellor has promised to take on anyone who gets in the way – even regulators.
But since then, yet another potential threat to retirements has emerged in the form of new Dutch-style pensions known as collective defined contribution (CDC) schemes.
Under new plans announced by Labour last month, employers and their staff could be offered the chance to sign up as early as this year.
Commonplace in the Netherlands, widely regarded as the world's best country for pensions, the schemes are being advertised as offering less risk and better returns for savers.
Yet some experts feel the Government is over-promising, whilst simultaneously using other people's money to relentlessly pursue growth at all costs.
The move also comes at a time when the Netherlands' wide scale CDC experiment has backfired, precipitating a seismic shift in its pensions setup.
A CDC scheme comprises elements of defined contribution and defined benefit pensions. Savers contribute a percentage of their salary and receive a regular income, and potentially a lump sum, in retirement.
For instance, they might receive 1/80th of their pay for each year they were a member, paid in the same way as a defined benefit pension.
The catch, however, is that their future income is only a target. It can go up or down at any point, even after retirement, depending on factors like investment performance.
Unlike a defined benefit scheme, savers are also not in control of their own destiny in terms of picking their investments or choosing what to do with their pot when they retire.
Such schemes are already permitted, although they can only include single or connected employers. Royal Mail's is the only current one in Britain.
Last month, however, Torsten Bell, the pensions minister, announced new rules to allow multi-employer schemes as early as this year.
He said: 'Too often at present we are leaving individuals to face significant risks about how their individual investments perform and how long their retirements last.
'Pooling some of those risks will drive higher incomes for pensioners and greater investments in productive assets across the economy.'
Just over a week later, TPT Retirement Solutions was first out of the blocks to announce it will launch such a scheme by the end of next year.
Andy O'Regan, chief client strategy officer, said: 'Making CDC accessible to all employers, regardless of size, is a significant step forward for the industry. It gives you the income in retirement that defined benefit schemes do, but without the employer having to take on that open-ended guarantee.
'I don't think CDCs put pensions at risk. If you look at when markets fall, that's likely to impact defined contribution and CDC. With CDC, if you've got fluctuations in the market, you can adjust [pension] increases over time to cope with it.'
In the official announcement, the Government also quoted modelling from the Pensions Protection Institute that suggested CDCs outperform annuities, which actually guarantee an income for life.
It claimed that annuities currently provide 40pc of someone's working income in retirement, but that single employer CDCs would offer 47pc. The planned multi-employer CDCs would provide 67pc, it said.
However, some experts have concerns.
Tom Selby, of AJ Bell, said the Government was offering the 'land of milk and honey' and using other people's money to pursue growth.
He said: 'There is no guarantee that CDC schemes will deliver higher incomes than existing defined contribution schemes and comparing them to annuities suggests the income setup is the same, which it isn't.
'Annuities pay a guaranteed income for life, whereas CDC schemes aim for a target income which could be reduced if investments underperform, which is exactly what happened in the Netherlands.
'Offering people a choice of retirement income options is a good thing, but the Government needs to be transparent about what's really happening here – it wants to use other people's money to deliver on its economic agenda.'
CDC schemes come with other risks. A House of Commons briefing noted that members could be worse off in CDC than in defined contribution schemes if they die early, because they've effectively subsidised the pensions of those who live longer.
There's also a perceived risk that older generations will have their pensions paid by younger ones who may receive less themselves. This should be less of an issue for UK schemes due to their design, but the risk cannot be eliminated.
The plans also come at a time of major change in the Netherlands, where CDCs are the most common pension scheme.
Paul Waters, of pensions advisers Hymans Robertson, said the country was now moving away from CDC and into defined contribution schemes.
He said: 'What I believe happened is first of all they didn't communicate the risk of cuts particularly well. Secondly, the way it was designed is that when cuts were made, they weren't made universally. Older people receiving pensions didn't suffer cuts, but younger people still paying in effectively had pension cuts, so intergenerational unfairness undermined the whole thing.
'The design which the UK government has put in place has learnt lessons from other countries with CDC. The way regulations have been written is that should there need to be a cut, it has to be applied equally across everyone.
'The cautionary tale is around communication. We definitely think you can get higher pensions, but there will be times when pensions go down. You have to communicate this risk clearly and make sure that each person gets the right level of benefit for their saving.'
Across the pensions industry, something that experts do agree on is that people aren't saving enough for their retirements. Many have called for urgent increases to the minimum contribution rate set by auto enrolment rules, currently 5pc for employees and 3pc for employers.
Labour, however, has indefinitely delayed the second half of its pensions review, which was expected to address this crucial issue.
Meanwhile, there are no such delays to introducing CDCs, allowing access to pension surpluses or pushing pension providers into investing more in the UK.
Plans to move pensions into inheritance tax by 2027 also seem firmly on track. All four moves will guarantee a significant windfall – but for the Government, not for pensioners.