Could big be beautiful in the pensions world?

minimal risk, but there is a target set for what the employee will hopefully receive on retirement.

CDCs can be huge – involving much more than just one company, perhaps a whole industry. The idea is to achieve economies of scale.

CDC supporters maintain they would produce bigger pension pots, reduced risk and greater certainty.

The Government Actuary Department investigated in 2009 and found that CDC schemes could deliver a retirement income up to 39 per cent higher than an individual pension.

A November 2013 study of CDCs between 1955 and 2011 by consultants Aon Hewitt concluded that those retiring on the average DC scheme received 21 per cent of their previous salaries but those on a CDC scheme would get 28 per cent. Yet it also showed that CDCs did not provide superior returns every year. Between 1994 and 2004, the reverse was true.

Critics claim this is vastly optimistic.

They question some of the assumptions made and point out that a CDC would not necessarily be the right scheme for everyone. Indeed, because the funds are shared by people of all ages and walks of life, different CDC members may have different priorities. Plus, there is no guarantee a CDC will perform better simply because there are more people in it – in 2012, a quarter of the schemes in the Netherlands cut pensions by an average of 1.9 per cent to restore their finances, producing widespread public fury.

How would you get enough people to throw their hats in with a CDC? The TUC, an enthusiast, has suggested incentivising employers to get schemes off the ground.

Hard to see the level of cooperation required catching on in the UK. Some suggest it would be an administrative nightmare.

Why would you want another huge shift in the pension system given the government’s auto-enrolment initiative?

It also goes against members being able to take their pension pots with them when they move jobs.

And the collective concept contrasts totally with recent government pension reforms which allow increased flexibility and more individual choice, plus being in conflict with the trend towards semi-retirement be that by choice or necessity.

My view is that CDCs are theoretically a possible solution to many individuals having little access to certainty of retirement income.

However, these schemes can struggle as the membership profile ages.

And one must question the assumption that plan managers are able to ‘de-risk’ the investment strategy. Reducing investment risk isn’t always easy.

Many assets that have been seen as low-risk currently carry significant risk premiums, fixed interest securities for example.

The concern is that fluctuating demographics, legislation and investment markets pose significant concerns about their long term viability.

The first priority is to simply get people to save more for their retirement – regardless of the scheme used. As Workplace Pensions become fully established and contributions are pushed up to realistic levels, we will be moving in the right direction. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice