The government's consultation on collective defined contributions (CDC) schemes will consider the most appropriate methodology for pension transfers and if these should be subject to a financial advice requirement.
Pensions minister Guy Opperman confirmed a consultation on the introduction of CDC schemes in the autumn but said there were "a number of issues that need careful consideration and handling if this type of scheme is to be properly run, and if members are to have confidence in it".
Mr Opperman made the comments in the government's official response to a report by the Work and Pensions select committee called for CDCs to be rolled-out.
As part of its consultation the Department for Work & Pensions (DWP) will consider whether CDC scheme members should be allowed to transfer out in the decumulation stage and, if so, what methodology should be used to calculate transfer values to balance individual rights against collective longevity pooling benefits.
The consultation document will also include several recommendations from the committee, such as the appropriate methodology for calculating cash-equivalent transfer values for CDC scheme members in the accumulation stage.
The government will also seek views on whether transfers out of CDC should be subject to a financial advice requirement above a certain threshold.
The DWP will also consider how to ensure effective communication so CDC members have a clear understanding on the benefits and risks of such a scheme before joining one.
Mr Opperman said: "We need to ensure that collective arrangements work properly for all parties, both members and employers. We need to safeguard against employers being held to be liable to the scheme at a later date, if they are to have confidence that pooled schemes are an appropriate replacement for existing arrangements.
"At the same time we need to ensure that such schemes meet minimum standards of governance and transparency, so that members understand clearly how their schemes work and when and how benefits will be adjusted."
CDC pension funds differ from defined contribution pensions because they do not produce individual pension pots. Instead they invest savings in a large collective pot which provides an income in retirement to its members.
They also differ from defined benefit plans because do not guarantee a particular income in retirement and instead have a target amount they will pay out based on a long term, mixed-risk investment plan.
The Pension Schemes Act 2015, passed by the coalition government, referred to CDC schemes but the secondary legislation to create them was never introduced.
Royal Mail is currently working with the DWP on the changes needed to introduce CDC schemes in the UK after reaching an agreement with the Communication Workers Union to set up a collective scheme for its employees, which was given approval by workers in April.
Several pension experts have questioned if collectively-invested pension schemes would be able to comply with pension freedoms, which were introduced in 2015.
But Independent Labour MP Frank Field, chairman of the Work & Pensions select committee, praised the government’s response.
He said: "The historic deal struck between Royal Mail and CWU, combined with the government’s ready willingness to make CDC pensions a reality, mean a huge change is coming to the UK pensions landscape, offering a new and different kind of 'pension choice'."
Paul Masterton, Conservative MP for East Renfrewshire, has also pushed for new legislation for these pension schemes and introduced today a 10 minute rule bill to the House of Commons, to allow the introduction of CDCs.
He said: "I welcome the pensions minister's announcement of a consultation this autumn on the introduction of CDC pensions, although I expected that it would have been brought forward already, and I do hope the government can make progress on that consultation as soon as possible.
"I hope that by bringing forward this bill today I can help encourage that process along and give the pensions minister a nudge along the way."
Alistair Cunningham, chartered financial planner at Wingate Financial Planning, said: "Given the protections in place it would make sense to treat them as safeguarded benefits, but as to whether £30,000 is an appropriate threshold to mandate advice, that’s another question!"
maria.espadinha@ft.com
