Collective defined contribution (CDC) schemes will offer members and employers a more satisfactory balance between affordability and security if they can meet both parties’ needs, according to Unbiased.
The adviser directory site said the main advantage of CDC schemes is that the investment risk is spread across all members with the effect of reducing volatility - effectively the amount by which the pot's value fluctuates.
The government has introduced a bill to allow for CDC schemes to be introduced, with Royal Mail set to launch the first scheme of this type. The government is also considering whether master trusts and multi-employer schemes could offer such provision.
CDC has been touted as offering the potential for higher and more predictable retirement income compared to individual defined contribution schemes, as well as better transparency of costs and liabilities than defined benefit (DB) provision.
Until a CDC scheme exists fully within the UK however, how exactly many would balance affordability remains "open to conjecture", Unbiased said.
It added that the pros and cons remain primarily dependent on whether someone is a member or an employer and that balancing needs on both sides is vital.
"Compared to DB schemes, they're clearly less attractive to members as the income they offer is not guaranteed and may fall, even after payments and commenced," said Unbiased. "Conversely, they are more attractive for DB employers since there is no chance of creating a pensions ‘black hole' that could eat up their company."
On the DC side, Unbiased added there is "the advantage of lower investment risk and potentially more certainty over retirement income" for scheme members as they are also "simpler to understand" and do not require "high-pressure decision making" at the point of retirement.
Unbiased concluded: "Employers will need to take care that their CDC schemes are set up fairly [as] concerns have already been raised that younger members' contributions could be used to pay older members' benefits.
"Such fears will need to be allayed by putting safeguards in place if UK workers are to feel comfortable paying into such schemes."
Ahead of the 11 March Budget, the Society of Pension Professionals polled its members in research released today (9 January). Members agreed finalising legislation governing CDC should be at the bottom of the government's list of key priorities.
