The government’s consultation into draft regulations governing collective defined contribution schemes requires more work on definitions if these pension funds are to be properly implemented, with the Pensions and Lifetime Savings Association warning it could create a “back door” for unscrupulous employers.

In a CDC scheme, contribution rates for employers and employees are set in advance, and members pool investment and longevity risk. These pension funds provide income in retirement, though the rate of increase varies and pension reductions are possible in certain circumstances.

In his foreword to the Department for Work and Pensions consultation, which closed on Tuesday, pensions minister Guy Opperman explained that CDC schemes have long been seen “as a third way between traditional final salary schemes that are guaranteed by employers, and individual defined contribution schemes where investment and longevity risks are born by the individual members”.

CDC schemes have greater potential than DC to invest in illiquid assets such as infrastructure, and “recent studies have shown that a well-designed and well-run CDC scheme can also be resilient to sudden changes in market conditions, such as we have seen during the current pandemic”, he continued.

At present, the government is focusing purely on CDC schemes set up for single employers or connected employers, a fact Tim Middleton, director of policy and external affairs at the Pensions Management Institute, told Pensions Expert would mean initial demand for these schemes would be limited.

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