The UK needs to conduct further research into the challenges posed by the introduction of collective defined contribution (CDC) schemes in order to make them a success, according to the Pensions Policy Institute (PPI).

In a briefing note on what the UK can learn from how CDC schemes are run in the Netherlands, Canada and Denmark, the PPI has warned that there are still some key challenges to be considered by The Pensions Regulator and those responsible for designing specific CDC schemes.

The author of the report, PPI senior policy researcher Lauren Wilkinson, said the creation of CDC schemes needed to be backed up by detailed investigation into a number of areas, including: Valuation and benefit adjustments; intergenerational fairness; sustainability in voluntary membership; and contribution rates.

Wilkinson argued that establishing fair and transparent processes for valuations and benefit adjustments are "vital" to the success of CDC schemes.

She wrote that international experience shows that clearly defined response plans in the event of changes in funding positions and associated benefit adjustments, are essential. These would have to be drawn up to mitigate the discretionary nature of benefits and ensure fairness between different groups of members.

In terms of making sure that CDC schemes are fair and sustainable, Wilkinson also said that the distribution of risks across cohorts will need to be "carefully considered".

"The use of buffers or capital reserves in CDC schemes internationally can be a significant source of intergenerational inequity," she wrote.

"UK schemes will not utilise buffers, instead using frequent, universal benefit adjustments to rebalance funding ratios on an annual basis. While this approach is likely to lead to greater volatility year‐on‐year, it is also likely to mean there is less cross‐subsidy from younger to older members, and therefore less propensity towards intergenerational unfairness."

However, this will require and effective approach towards clear and timely communication to members to manage expectations and build trust during times of volatility.

The briefing note also said that establishing trust, transparency and fairness between different groups of workers will also be crucial. This is in order to ensure that opt-outs and transfers out of CDC schemes do not threaten "the scale and sustainability of the scheme over the long term".

The international examples of CDC schemes mentioned in the paper rely on mandatory membership, but membership of UK schemes will be voluntary.

When it comes to contribution rates, Wilkinson points out that they will need to be set at a level that is judged as reasonable in order to achieve targeted benefits, while also taking affordability into account. "Both the level of contribution and the way in which contributions are converted into future benefit entitlement have implications for CDC scheme design," she stated.

This will also have implications for the scope for individualisation within CDC schemes, whether relating to contribution rates, investment choice or other factors as well. In addition, contribution rates that are set too high could lead to more opt-outs and threaten a CDC scheme's viability from the onset.

Trustees will be able to apply for authorisation to operate CDC schemes from August of this year.

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