'Collective defined contribution schemes have worked successfully in other markets such as Holland for many years, but policymakers have been slow in bringing the idea to the UK.
'As defined benefit pension schemes are nearing extinction and defined contribution schemes offer uncertain outcomes to members, there is a real gap in the market for CDCs. But you have to wonder why such schemes weren't offered to employers when automatic enrolment was first introduced.
'The thinking behind CDCs is very sound – effectively they work like old-fashioned 'with profits' policies that smooth out returns to members year by year. Because members' contributions are pooled, there are economies of scale and longevity risks are shared. While member outcomes should be better, there are still no guarantees and communication to CDC members will be a major issue for trustees to overcome.
'For employers, CDCs offer a way of providing pension scheme provision, which offers an income in retirement from the scheme's own assets without the risks and balance sheet impact of sponsoring a defined benefit plan.
'However there are some real challenges to get these schemes off the ground. Assurances would be needed by employers that their costs would be capped forever. If not, we could end up going down the same path as for the original defined benefit schemes. While they started many years ago as a 'promise', over time the government legislated to make them binding commitments.
'One of the dangers here is that any final legislation will become so onerous as to make it unattractive for employers to participate. Time will tell.
‘What all pensions professionals should be asking themselves in considering the consultation is – is this likely to end up in a pensions savings vehicle that I would be confident in handing over my hard-earned savings to?’