The Work and Pensions Committee has announced its plans to launch an inquiry into Collective Defined Contribution schemes
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The Committee's inquiry will consider the merits of CDCs, the role that they could play in the pensions landscape, the potential benefits to savers and the wider economy and the legislative and regulatory framework that would be required to successfully implement these schemes.

Also known as defined ambition schemes, CDCs differ from defined benefit schemes as they do not promise a retirement income, but have a target or "ambition" amount that it will pay out to members based on long term, mixed risk investment plans.

These schemes have view to pay out an adequate level of index-linked pension for life, but also have the ability to redifine the benefits offered if circumstances, like volatile economic conditions occur.

Compared to traditional DC schemes, CDCs produce a larger collective pot, rather than an individual pension pot for each member. As a result, the pension freedoms do not apply to this type of scheme.

The Pension Schemes Act 2015 outlines "shared risk/defined ambition" or CDC as a distinct category. Despite this, however, regulations under the Act to implement these schemes have not been introduced. This was delayed by further announcements in October 2015 that plans for CDCs would be paused indefinitely in order to allow for auto-enrolment and pension freedoms to be implemented.

Those in favour of CDC schemes have argued that they provide greater assurance of retirement income and more efficient pooling of costs and risks among members than traditional DC schemes. Also, CDCs do not impose the burden of underwriting a pension promise on employers, it has been noted.

The Work and Pensions Committee has referred to studies by the RSA and Aon Hewitt that predict that CDC could have delivered 33 per cent better pension outcomes than traditional DC schemes over the past half-century.

In contrast, those opposed to these schemes have argued that CDCs may further fragment the pension landscape, have a lack of demand and goes against greater individual freedom in the space, such as the freedom and choice policy.

Nonetheless, as identified in the Budget earlier this week, the Chancellor's plans to unlock investment in UK infrastructure through longer-term investment has identified CDCs as a potential source of this type of investment.

Committee chair Rt Hon Frank Field MP said: “What the Select Committee is aiming for is to retain some of the best features of company schemes in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could instead club together and pool the risk themselves.”

The committee is accepting submissions to the inquiry until 8 January 2018. More information can be found here.

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