The Government’s Pensions Bill will create a third option for UK pension provision of ‘Defined Ambition’ to sit alongside Defined Benefit and Defined Contribution.

This is a moderately good idea being delivered at a particularly badly timed moment. As a consequence, even its most enthusiastic proponents do not anticipate anything more than at best a very slow and gradual take up of this new type of pension scheme. We have yet to come across a single employer who has confirmed that they definitely intend to introduce one of these new schemes for their employees.

The Good
Risk sharing in collective defined contribution (CDC, one of the main types of Defined Ambition) pensions can potentially allow investors more prolonged exposure to volatile investment assets through into retirement, thereby boosting their payouts.Collective defined contribution schemes also eliminate any of the complicated decision making for members at retirement, as the scheme delivers them to and then through retirement.Even if demand for them is low today (see below) it can be argued that by creating this legislation now, the Pensions Minister has ensured that if the pendulum of demand swings back again, employers will then be in a position to use this new type of arrangement for their staff.

The Bad
Collective Defined Contribution schemes are very similar to with profits funds. They rely on actuarial smoothing and cross subsidies. They can go wrong; past experience suggests that eventually they probably will go wrong. When that happens, the consequences can be just as unpleasant for the members as any underperformance in a conventional individual defined contribution plan.The poor and the unwell cross-subsidise the healthy and the wealthy. Unlike in a defined contribution plan, where a member with poor life expectancy can get an enhanced annuity, in a CDC scheme they simply end up cross subsidising the healthier (and often wealthier) members.

These schemes are likely to be incompatible with the new budget freedoms, meaning employers will have to choose between auto-enrolling their employees into either a CDC scheme, or one where they have the option to take all their money back. CDC schemes discourage personal engagement in retirement planning; they perpetuate a dependency culture and expectation among the members that someone else is taking responsibility for their retirement. Better by far to encourage them to engage with their retirement provision and ensure that they are saving enough.

The Ugly
The timing couldn’t be worse. Large employers have already gone through auto-enrolment; they don’t want to go back now and redo the whole exercise as a Defined Ambition scheme. In addition, the Chancellor’s new pension freedoms announced in the budget are pulling pensions in precisely the opposite direction. Without a large employer, industry trade body or union to embrace Defined Ambition and to provide the numbers of members and momentum they require, it is hard to see how they’re going to get off the ground for the foreseeable future. Whoever does first embrace this new type of scheme will have to bear all the set up costs whilst having to wait many years to reap any benefits.For now all the momentum is away from Defined Ambitions schemes, as the pendulum swings away from Defined Benefit towards Defined Contribution. The moment for Defined Ambition has been missed and it may be many years (if ever) before it swings back again.