UK – The introduction of a “basic” collective defined contribution (CDC) system in the UK would not cause a “massive” legislative burden, a partner at consultancy Barnett Waddingham has suggested.

Discussing how the Department for Work & Pensions (DWP) should proceed with its defined ambition (DA) agenda – officially launched last November when the government unveiled a number of policy proposals as part of a paper on reinvigorating the occupational pensions market – Danny Wilding said a basic collective model would be the “horse [the DWP] should be backing initially”.

“If that is successful and the take-up is good, then they could look at further variations and sophistications down the line,” he said a month after pensions minister Steve Webb expressed an interest in collective vehicles that pooled investments.

He argued that the introduction of a CDC system, considered by the previous Labour administration, would not be a “massive” legislative burden and suggested there would likely be discussions with industry about the shape of legislation required to allow for such a collective model.

Wilding recommended allowing employers to pool their pensions budget into a collective and centralised vehicle, with benefits notionally allocated among members.

He said there would be an underlying target benefit – potentially an accrual rate of 1/80th based on combined contributions of 20% of salary.

“You then calculate the target benefit of 1/80th of salary for each year of service,” he said. “You value that on some pre-agreed actuarial basis, and then you look at the aggregate value of all of those target benefits and compare them with your collective fund.”

He said that if the collective fund were only able to meet 90% of the target, then members would only see 90% of the proposed benefits, but if the fund were able to deliver higher benefits, the additional income could also be distributed among members – in contrast to the Dutch approach to CDC that sees benefit cuts imposed if funds are falling short of promised payments, allowing the scheme to recover.

Wilding suggested a single large employer would be able to operate a standalone fund, but that smaller employers should probably seek out industry-wide or other collective arrangements.

“As long as the employers agreed the criteria up front – agreed the target benefits, and these targets benefits are valued for the purpose of pooling – then there is no reason why employers shouldn’t work together on this,” he said.

However, he added that, having more than one employer involved meant any future change would then have to be agreed across all employers before it could be implemented.

Wilding said he preferred an improved DC model over changes to defined benefit (DB) funds, as the former would be more effective.

“To be honest, DB-lite would only work – or there would only be appetite for that – if it were retroactive,” he said, noting that such an approach was unlikely, as it would be deemed politically unacceptable.

“They recognise that if they are only going to introduce things for future service, then DB light isn’t going to go far enough,” he concluded.

For more on defined ambition and the UK pensions landscape, see the September issue of IPE magazine.