Collective defined contribution schemes could offer “potentially superior outcomes” for many schemes in the UK and the necessary secondary legislation should be produced to implement this, Aon has voiced.

Responding to the Work and Pensions Committee’s inquiry into CDC pension schemes, Aon said that implementing CDC schemes could be extremely beneficial for many scheme members and could fill in some gaps in the existing UK pensions landscape.

In its written response, based on extensive research, analysis and CDC modelling, Aon noted that the introduction of this type of scheme would be both “justified and desirable”. Explaining Aon’s views, senior partner Kevin Wesbroom said that the firm believes that CDC schemes have “two distinct but connected advantages”.

The first being that CDC schemes could come into play with wage in retirement schemes, where an employer can no longer offer a defined benefit scheme but chooses not to expose members to the “variability and decisions” that are required under individual DC plans. As well as where the employer wises to deliver an income in retirement rather than just a capital lump sum at retirement, Aon outlined. It added that this could be useful for employers such as Royal Mail.

Aon added that CDC schemes would be effective as a standalone target lifetime income. “For a retiring individual defined contribution (DC) scheme member this would offer an income option not available in the market at present.” As a result, Aon believes that this would complement annuities, drawdown and other options available under Freedom and Choice.

The firm notes that CDC plans could sit alongside existing DB and DC schemes and the conversion from DB and DC to CDC should only be possible via individual transfers with the member’s consent.

From its reasoning, Aon has called for the government to produce the “necessary secondary regulations” to implement these schemes in order to “offer generations of savers the potential for improved pension outcomes”.

Aon partner Matthew Arends said: “In both of these cases, pension outcomes are likely to be superior to those that are currently available. They remove a huge amount of the variability of outcomes generated by traditional DC schemes, offer the potential for higher returns, and would be managed by skilled trustees rather than requiring individual members to take complex pensions savings decisions. For many people, Freedom and Choice means the freedom not to have to make a choice from the bewildering array of options forced on individual members.”

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