Why the UK and the Dutch have taken two very different approaches to collective pensions
The UK has become one of the few countries where collective defined contribution pensions exist. How does the way it is approaching CDC compare to the approach taken in the Netherlands, where these funds have been common? (AP Photo/Peter Dejong)
Good morning. Pension funds typically fall into one of two categories: defined benefit or defined contribution (the amount of money you get in retirement is either guaranteed or it isn’t).
But a third way exists - even if it is implemented in very few countries: collective defined contribution: everyone invests into one big pot and, in theory, longevity risk is shared.
These schemes currently exist almost exclusively in the Netherlands but the UK could prove fertile ground for them (Dutch pensions are currently going through a period of reform and will gradually transition to a new system by 2028 so I’m referring to the “old” version of Dutch CDC throughout here).
They have been legal in the UK since 2022 but so far only one exists: the Royal Mail Collective Pension Plan.
Last month WTW announced plans to launch a CDC fund for savers in retirement so I thought I would use this as an excuse to compare how they invest.
Obviously your DC pension pot invests in a mix of equities and bonds, with the proportion of bonds getting larger as the individual’s retirement age nears.
DB pensions meanwhile are likely to prefer low-risk assets - particularly if they have a buy-out in mind.
So what does (or did) the average Dutch CDC scheme look like? Something like this:
The striking thing was how similar the schemes I looked at were. Most of the funds had an equity exposure of between 28 and 31 per cent. One outlier had an equity exposure of 36 per cent.
How does this compare to what Royal Mail is doing in the UK? Well they do things very differently. Its income for life section (which accounts for more than 75 per cent of its assets), is almost exclusively invested in equities:
So what’s going on here?
Andrew Doyle, managing director of investments at WTW, said that in some ways the old Dutch version of CDC is closer to the DB end of the spectrum.
He said: “In particular there were funding tests in place which were based on the yield of low risk assets (the euro swap curve), which I suspect encouraged matching of assets and liabilities and therefore investment in bonds and low-risk assets.
“Also, solvency requirements were driven to a large extent by nominal interest rate risk and were therefore higher for schemes with lower interest rate protection.”
Catherine Donnelly, professor of actuarial mathematics at Heriot Watt University, said: “While both are described as CDC, the Dutch model remains closely linked to funding discipline and liability management, whereas the UK version is designed more as a long-term collective investment approach that targets sustainable income.
“The difference in asset allocation follows directly from those underlying objectives.”
This focus on growth assets aligns with how WTW is managing its CDC scheme (which is only aimed at those in retirement - not at those building up their savings).
Keith McInally, a director at WTW, said: “Due to the mechanism by which pensions are adjusted over time to reflect investment experience, we expect to target high growth allocations for longer. These can be very high allocations to growth assets - perhaps close to 100 per cent at the point of retirement.
"Even 20 years after retirement we might still be investing 50 per cent in growth.”
Doyle said: “A person could easily live for 25-30 years in retirement and that justifies a high allocation to growth.
“Liquidity would need to be carefully managed but private markets can be utilised in CDC because that timeframe is sufficiently long and you have thousands of members collectively invested in this.
"You have got confidence that what people want is an income for life and you’re paying out 6 per cent a year so you can tolerate more illiquidity in CDC than in alternatives.”
