UK employers should start considering collective defined contribution (CDC) as a viable arrangement ahead of the end of contracting-out in 2016, Aon Hewitt has said.

The consultancy said that pending confirmation from the Department of Work and Pensions (DWP), it expects CDC to be enshrined in new legislation in 2015, taking effect from April 2016.

Aon Hewitt said that employers could face additional costs of around 2.5%-3% of total payroll for defined benefit (DB) members as a result of the end of contracting-out, as they will no longer benefit from the reduction in national insurance contributions from their employees.

Matthew Arends, Aon Hewitt partner, said: "For employers who still offer DB schemes, this may simply make them unaffordable.

"We urge them to start considering CDC now as a desirable alternative to implementing a defined contribution (DC) arrangement in 2016. We also call on the government to provide some certainty as to the timetable for implementing CDC."

CDC schemes are pension schemes where members' savings are pooled together into a collective fund rather than in individual accounts, so that the impact of market volatility is reduced and access to additional asset classes becomes available.

Arends said: "A CDC arrangement will cost employers the same as a standard DC pension scheme, with no extra risk, while offering scheme members average pensions of over 30% higher than a typical DC scheme with the same contribution levels."

First published 18.02.2014

monique_simpson@wilmington.co.uk