Government puts defined ambition pensions on ice

Government puts defined ambition pensions on ice

The government believes now isn't the time to introduce the concept of collective defined contribution (CDC) schemes in the UK, as the market "needs time and space to adjust to other reforms underway," said Guy Opperman.

The minister for pensions and financial inclusion argued, in a letter to Alex Cunningham – at the time still shadow pensions minister – that risk sharing is an area that the government will "revisit once there has been an opportunity for that to happen".

CDC schemes are also known as a form of "defined ambition" scheme and differ from defined benefit schemes, since they do not guarantee certain incomes in retirement.

Instead, CDC have a target or "ambition" amount they will pay out, based on a long term, mixed risk investment plan.

These schemes also differ from the traditional defined contribution (DC) plans, since they do not produce individual pension pots.

They invest savings in larger collective pots instead, which then provide an income to individuals during their retirement.

The Work & Pensions select committee launched an inquiry on these type of schemes in November, since they have the "potential to address some of the concerns that policy makers and the public have about the current pension offer". 

The Pension Schemes Act 2015 created by the 2010 to 2015 coalition government defined "shared risk/defined ambition" or CDC as a distinct pension category.

However, regulations under the act to bring them into effect have not yet been introduced.

In October 2015, the government announced the plans would be shelved indefinitely so as not to distract from other major reforms such as auto-enrolment and pension freedoms.

In the document, seen by FTAdviser, Mr Opperman also said that "significant legislation" for CDC schemes to come to life would need to be introduced, and the existing rules would need to be changed.

He said: "We continue to believe that significant legislation would be needed to enable and regulate this type of pension.

"Whilst we continue to be interested in collective pensions, the governments view is that because the breath of its scope, the legislative framework set out in the 2015 Act is not the most effective way of introducing the provisions needed to provide for the collective schemes currently being called for."

Mr Opperman argued that since 2015, the appetite from employers and providers for CDC schemes "has not been forthcoming".

The only exception is Royal Mail, which is in talks with the Communication Workers Union to create a CDC as a way of solving its pension dispute, which the government is "watching developments with interest," Mr Opperman added.

However, this is not the view of all stakeholders.

Unite, the UK's largest trade union with more than 1.4 million members, would welcome the introduction of CDC schemes.

In its submission to the Work and Pensions committee inquiry, the union said: "We believe CDC schemes have the potential to deliver much better benefits for employees than the individual DC schemes that are becoming the norm.