The UK could look to develop collective risk-sharing models inspired by the Dutch collective defined contribution (CDC) or the Danish ATP model, according to the Department for Work & Pensions (DWP).

Launching a six-week consultation on the shape of defined ambition (DA) in the UK, pensions minister Steve Webb said the time was “ripe for innovation” and called on the industry to “reshape pensions for the future”.

The consultation paper also laid out a number of potential approaches to allow for greater risk-sharing and proposed several new defined benefit (DB) models, including a core DB with a flexible additional payout in the form of either conditional indexation or an additional payment.

In allowing for greater risk-sharing among defined contribution (DC) funds, the department seemed inspired by both the Dutch and the Danish systems, noting their dominance of the Melbourne Mercer Global Pensions Index.

Of the four models proposed as a way of increasing certainty for DC members, the DWP said it would consult on a money-back guarantee system, the possibility of investment guarantees, a retirement income insurance model and a retirement income builder, based around systems in place in Continental Europe.

“This model is similar in structure to the Dutch General Practitioners’ pension fund (SPH) and the mandatory ATP scheme in Denmark,” the paper notes.

Under the model, contributions would be split between a return-seeking pool and one buying deferred annuities.

The paper adds: “As a result, the individual has a degree of pre-retirement certainty over their retirement income and can always see some benefit for each additional year of contributions, as the guaranteed element increases.”

The department notes that, for both the ATP-inspired approach and a CDC model, scale and “sufficient” inflow of new members will be key.

“Given that we believe CDC schemes offer an alternative approach to risk sharing and have the potential to offer more certain outcomes than individual DC, we propose to explore further the changes to the legal framework that would be required to enable them to operate in the UK,” the paper says.

It also concedes that, while some types of CDC could already be possible in the current regulatory environment, others may require the creation of a new regulatory vehicle.

“Besides setting out the regulatory vehicle for these schemes, we will need to consider whether the framework should include other requirements to enable them to provide the high levels of governance that would be needed to protect member interests,” it continues.

“For example,” the paper adds, “there may be a case for a more formal approval arrangement on set-up, possibly by requiring schemes to obtain a licence from a regulator, as well as being subject to regulatory oversight of their funding levels.”

The proposals received a mixed response from industry, with Hymans Robertson noting that existing models already allowed for risk-sharing, which employers had failed to pursue.

John Walbaum, partner at the consultany, added: “Employers have invested heavily in DC in recent years and are unlikely to return to defined benefit unless they are compelled to do so.”

The National Association of Pension Funds was more positive in its assessment, with chief executive Joanne Segars saying the DA proposals heralded a major step towards the creation of sustainable DB and innovative DC.

“They will help create a framework to enable the development of a genuine mixed economy of pension provision, where employers are free to provide pensions that are right for them and their employees,” she said.

However, Segars also said that the timing of any DA legislation would be “critical” to allow employers sufficient time before the end of opting out in 2016, and warned that DA would not be of interest to all quarters.

Barnett Waddingham partner Danny Wilding seconded Segars’s concerns about the looming end of contracting out.

He added: ”If firms are to be able to offer one of the structures discussed in the consultation, then real priority needs to be placed on making sure the legal framework is in place.”

Cardano’s head of innovation Stefan Lundbergh said it was important any collective model treat individuals fairly.

“There is no single perfect solution, but the consultation shows there are models that work,” he said.

He said the firm preferred the retirement income builder model, on which it provided the DWP with modeling.

The consultation closes 19 December.