The UK government has confirmed its intention to legislate for the permittance of collective defined contribution (CDC) pension funds, with industry representatives mixed on responses.

The commitment to CDC was made in today’s Queen’s Speech, a statement by the UK’s head of state regarding Parliament’s course of action in its next session, which begins in the autumn.

The general aim is to implement CDC, which will require the creation of new legislation, by 2016, in line with the launch of the new single-tier first-pillar pension.

The requirement of CDC’s implementation by 2016 is significant as it heralds the end of contracting out for defined benefit (DB) schemes, with the expectation for scheme closures, due to additional costs.

CDC, part of pensions minister Steve Webb’s aim for greater risk-sharing, is seen as a potential midway point, stopping these DB closures resulting in members being moved into pure-DC arrangements.

The legislative background in the UK does not currently permit any such arrangement, with any pension scheme where 100% of the risk is not placed on an individual member regulated under the complex DB code.

However, while some sections of the UK industry welcomed an additional feature of the pensions market, many have lamented its lack of appeal or consistency with other proposals, as well as its timing.

The National Association of Pension Funds (NAPF) praised the increased flexibility CDC brings, but said the focus for DC should remain on good member outcomes.

The group had previously called on the government to slow down its reforms of the DC market, as the industry swallows recent Budget changes, and a cap on charges by 2015.

Chief executive Joanne Segars admitted CDC had a role to play in this, but governance, low charges and investment strategies were fundamental.

“The real goal here has to be schemes operating at scale,” she said. “Scale is a necessary precondition for CDC, but it also enables a much wider range of member benefits.”

Duncan Buchanan, a lawyer and president-elect of the Society of Pension Consultants (SPC), said, given increased flexibility in at-retirement DC options, CDC’s appeal in the UK was diminished.

“It is unlikely employers will feel pressure from employees to establish or contribute to new-style ‘risk-sharing’ schemes,” he said.

“CDC requires critical mass to make risk sharing fair. Without large numbers of members, these collective schemes might not be able to get off the ground.”

LCP, a consultancy, said while it welcomed the reforms, it agreed with the SPC that quick take-up was unlikely.

Alex Waite, LCP’s head of corporate consulting, said: “This type of pension scheme has some attractions. However, pooling risks between members generates winners and losers, and it is likely that anyone that loses out materially will call foul. Against this background, it is unlikely employers will rush to set up CDC schemes.”

However, defending the announcement, Danny Wilding, partner at consultancy Barnett Waddingham, said while CDC might not be right for all employers, allowing it as an option is welcome.

“CDC has the potential to offer more generous and stable pension returns to scheme members and act as a viable alternative to both DC and DB schemes,” he said.

Lee Hollingworth, head of DC at consultancy Hymans Robertson, said CDC would have distinct winners and losers.

“Potential losers include younger savers and the less well-off,” he said. 

“The muted reaction of employers is based in part on the Netherlands’ experience. There, employers have found themselves paying in extra money rather than face the industrial relations impact of benefits being reduced.”

Tony Hobman, chair of the advisory board at Lincoln International Pensions Advisory, and former chief executive of the UK regulator, said CDC funds come with greater risk which need greater governance in order to be mitigated.

”We need to understand who will be looking after this money, who will they be investing it with and who will be monitoring the risks involved,” he said.

“Collective pensions will need very high standards of governance and risk monitoring. The DC environment is only just beginning to get to grips with this challenge.”

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