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Defined Contribution

U.K. extends defined ambition consultation; industry split on appropriateness

The U.K. government gave the pension industry until the end of the month to submit comments on its defined ambition inquiry, launched in November in efforts to find a substitute model for underfunded defined benefit plans.

Collective defined contribution arrangement, also known as defined ambition, exists in Canada and the Netherlands. It is considered a bridge between defined benefit and defined contribution plans, where collective vehicles set out to pay a target or "ambition" amount of income to plan participants instead of a guaranteed amount.

Frank Field, chair of the Work and Pensions Committee, which leads the inquiry, when asked about the reasons behind extending the deadline beyond Monday, said: "We have had a good response so far to our call for evidence, but the committee felt there was scope after the Christmas recess to provide more time for interested parties to submit their evidence."

Some industry participants shared their contributions and comments with Pensions & Investments ahead of the new deadline.

Ralph Frank, co-head of Cardano's DC business warned: "Our experience of the Netherlands shows there are some major pitfalls to CDC. Members often think it's like a DB scheme, where income is guaranteed, but this is not the case."

Mr. Frank added: "Also, (these) schemes are complex and more expensive to run than traditional DC and, if anything, are likely to result in less assets being available to members as a result. (In addition), setting income levels can also be very challenging."

Separately, Pensions Management Institute conducted a survey of 99 consultants, trustees, administrators, actuarial, legal and investment professionals to support its contribution to the inquiry.

The survey found that more than half of respondents did not think the CDC arrangement was the right solution for stressed pension funds because it would be detrimental to participants. Some 53% of respondents thought it would leave plans vulnerable to funding problems in the manner of DB funds.

Intergenerational cross-subsidies was also seen as a disadvantage, with some 47% concerned that the contributions of younger participants could be used to provide benefits for retirees rather than secure deferred benefits for younger participants.

However, at the same time, survey results showed that 53% of respondents thought that the introduction of CDC arrangements would improve standards of workplace retirement provision, while some 52% believed employers would support the introduction of CDC plans.