The consultation will look to gather views from across industry to shape legislation and to ensure "this new type of pension scheme delivers for both employers and employees", the government said.
All CDC schemes will be subject to a charge cap of 0.75 per cent - which already applies to defined contribution (DC) pension schemes - to protect members' investments and ensure costs are controlled.
The government has also proposed these schemes will have to undertake annual independent valuations once they have been authorised, to "ensure that members are protected and schemes are sustainable", with CDC trustees subject to fit and proper persons tests, the Department for Work and Pensions (DWP) said.
CDC pension funds differ from DC 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 (DB) plans because do not guarantee a particular income in retirement and instead have a target amount they pay out based on a long-term, mixed-risk investment plan.
The Pension Schemes Act 2015, passed by the coalition government, including a provision for the creation of 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 after reaching an agreement with the Communication Workers Union to set up a collective scheme for its employees after it closed its DB scheme.
Several pension experts have questioned if collective pension schemes would be able to comply with pension freedoms, which were introduced in 2015.
But Guy Opperman, minister for pensions and financial inclusion, said CDC schemes were an "important innovation which will provide more choice and flexibility for pension scheme members and employers".
He said: "I’m grateful to Royal Mail and the Communication Workers Union for their assistance in getting us to this point.
"It’s important we get this right which is why we’re consulting on the detail of our proposals before bringing legislation forward. I want to hear the views of the pensions industry as we prepare to introduce CDC pension schemes."
Mr Opperman had confirmed there would be a consultation on the introduction of CDC schemes in the autumn in his response to the Work and Pensions select committee earlier this month. The committee had called for CDCs to be rolled-out.
He added that the DWP would consider whether CDC scheme members should be able 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 government would also be seeking views on whether CDC transfers should be subject to a financial advice requirement above a certain threshold, he said.
The DWP would also be considering how to ensure effective communication so CDC members had a clear understanding on the benefits and risks of such a scheme before joining one.
David Willetts, executive chairman of the Resolution Foundation, chairman of the Intergenerational Commission and a former Conservative minister, was in favour of the introduction of CDCs.
He said: "One of the ongoing challenges from employers moving from DB to DC schemes is that individuals bear too much of the risk, from the ups and downs of investments, to the uncertainty of how long each of us will live.
"CDC pensions can help reduce these risks, ideally as part of a wider package of reforms, so the government’s move to encourage the development of these schemes is very welcome.
"While few millennials today will be aware of what a CDC pension scheme might entail, many may well be grateful for innovations of this type when they approach the end of their working lives.”
Tom Selby, senior analyst at AJ Bell, said that in establishing the framework for such schemes to exist in the UK, it was important both the benefits and potential risks were fully explained to members.
Mr Selby said: "If the government believes there is demand from employers and savers for CDC it makes absolute sense to build a framework to support them".
But he noted this would need to ensure members benefit from the "same levels of governance, transparency and fairness that exist in the conventional DC market".
"It will also face challenges in ensuring the inherent intergenerational conflict that exists in CDC schemes are managed," he concluded.
maria.espadinha@ft.com
