Collective defined contribution plans are catching on across Europe, following the launch last month of a U.K. review of the defined ambition model and changes to German law earlier this year.
The U.K. government launched an inquiry Nov. 24 into collective defined contribution plans in an effort to address the ongoing cost and challenges of providing a defined benefit plan. Much like in Germany until recently, collective DC plans are not allowed in the U.K. by law.
The government sees defined ambition plans as arrangements that do not promise a certain retirement income. Instead these collective vehicles set out to pay a target or "ambition" amount of income in retirement to plan participants, subject to supportive market conditions.
Some sources said the CDC plans could see success in the U.K., serving as a bridge between defined benefit and defined contribution plans. The key advantage of implementing them for employers, sources said, is that such plans smooth plan participant outcomes through sharing risk. Under a CDC plan, the traditional pension plan's guaranteed benefit based on a participant's ending salary would be replaced by a plan that pools investments across participants and aims to give each a target for retirement income. Dubbed defined ambition in the U.K. as well as in Germany, this model strives to create a more sustainable structure than defined benefit funds. And unlike traditional defined contribution plans, the costs and risks are shared.
Kevin Wesbroom, senior partner at Aon Hewitt in London, said in a telephone interview: "We are aware of two major defined benefit funds that might well want to utilize the CDC model rather than switch to a regular DC.
"Our modeling of CDC outcomes prior to 2015 found that a CDC model could offer a 30% uplift in returns, resulting from risk sharing, over a conventional DC with individual accounts," Mr. Wesbroom said.
But some plan executives and consultants are concerned the model does not solve the problem of cross-subsidization, where younger generations carry the weight for older plan participants.
In 2013, Steve Webb, then-U.K. minister for pensions, floated the idea of collective DC plans. Now, with retirement savings exceptionally high on the Labour Party's agenda, according to Mr. Wesbroom, the idea is getting more attention.