Rachel Reeves gearing up for Dutch-style pensions takeover – everyone could be worse off

Chancellor Rachel Reeves is considering a major change in how pensions work in the UK. This new approach would move toward a Dutch-style pension system known as a Collective Defined Contribution scheme, or CDC for short. In this kind of system, instead of each person managing their own pension pot, everyone contributes into a shared fund. That money is then used to pay out regular incomes to all members when they retire. The idea is that by pooling money together, people can get more stable retirement incomes and face less individual risk.

One of the main goals of this new plan is to increase pensioners’ income while also using some of this collective money to support government projects and grow the economy. The government says these CDC schemes could help reduce the risk that people run out of money during retirement, since it’s managed collectively. But there’s a catch: individuals won’t have as much control over where their money is invested or how much they can spend. The income they get in retirement might also go up or down depending on how well the investments perform.

This system is already being used by Royal Mail workers in the UK, but only within that specific company. Now, the government wants to expand the idea so that entire industries or sectors can have shared pension funds. Pensions Minister Torsten Bell explained that traditional individual pensions come with a lot of uncertainty. People don’t know how long they’ll live or whether their investments will do well. He says pooling everyone’s money and risk could bring better outcomes for most people.

However, not everyone agrees with this plan. Some experts, like Tom Selby from AJ Bell, are concerned. He warned that there is no promise these new CDC schemes will actually give people better incomes than what they currently get from standard pension schemes. He also said comparing CDC schemes to annuities is misleading. Annuities give a guaranteed income for life, but CDC pensions only aim for a target income, which could be cut if investments don’t perform well — and that’s already happened in the Netherlands.

Another problem is fairness. A report in Parliament pointed out that people who die younger may lose out because their pension contributions end up helping to support those who live longer. This means not everyone will benefit equally. Some people may end up putting in more than they get out.

In the end, critics argue that the government wants to use people’s pension savings to help boost the economy, and they should be more honest about it. While the idea could help some pensioners and support public projects, others may feel like they’re losing personal control over their own retirement money.