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 The past 18 months have seen significant developments in Collective Defined Contribution (CDC) pensions which could benefit millions of future savers. The Royal Mail CDC scheme went live in late 2024, marking the UK’s first single-employer CDC scheme under the existing CDC legislation. Since then, momentum has continued. Legislation is now being finalised to allow for multi-employer schemes, with the first scheme to launch in mid 2027. |
By Hannah English, Partner and Head of DC Corporate Consulting and Mark Stansfield, Senior Actuarial Consultant, Hymans Robertson This is an exciting time in the pensions market. It also provides employers an opportunity to consider whether this type of arrangement could be right for them and their staff. What is a CDC scheme and why does it present an opportunity?
A CDC scheme can be seen as a halfway house between a Defined Benefit (DB) scheme and a Defined Contribution (DC) scheme. Broadly, the key principles of its design are set out below:
Investment and longevity risks are pooled across all members of the scheme.
Pooling investment risk across generations allows for a higher allocation to grow assets for longer than in strategies that derisk investments as members approach retirement.
Pooling longevity risk means members who live longest are protected from running out of money, funded by those members who die earlier.
Members build up a level of pension for each year of service. The amount reflects the value of their contributions and the cost of providing the benefit.
Pension income is designed to increase each year and provide an income for life, more like DB, but it can decrease if the benefits become unaffordable.
Members trade some control, flexibility and the ability to pass on unspent pension on death, as they would in DC, in return for a more secure income for life.
A key aspect of CDC schemes is that, by pooling members and sharing risks, they have the potential to deliver better retirement outcomes than a DC scheme. What is multi-employer CDC?
CDC can currently be delivered through single-employer schemes, such as the Royal Mail. Looking ahead, it will also be possible to deliver CDC through multi-employer schemes.
Multi-employer CDC schemes are expected to operate for “unconnected” employers in the same way to how DC master trusts work today. This could provide employers with the opportunity to: Achieve lower operating cost than running a single-employer CDC scheme.Outsource governance to the scheme provider.Retain freedom to move away from CDC provision and leave the scheme in future. Why should employers consider a CDC scheme for their employees?
Our research shows strong interest in CDC schemes among UK corporate pension decision-makers. 91% of respondents said they are likely to consider CDC or similar schemes for their business.
Some of the appeal includes:
Higher pensions for members from the same contribution amount. A CDC scheme may provide between 20-50% better retirement outcomes for members, compared to other DC schemes.
A focus back on pension income rather than a pension pot. Shifting the emphasis to income may help employees better understand their likely standard of living in retirement.
Reduced decision-making for members at and through retirement. This can help make the retirement journey simpler for members.
Life assurance benefits within the scheme. CDC schemes are exploring ways to provide life assurance benefits, such as a spouse pension and death-in-service cover, which most DC schemes do not offer.
Potential for reduced costs for employers. CDC could allow employers to manage contribution costs while still supporting comparable or improved expected retirement outcomes compared to their current DC offerings.
CDC may not be right for everyone. There are also risks that must be considered. These include how a CDC scheme is communicated to members, and of the reduced flexibility members have in how they can access their pension at retirement compared with a DC scheme. However, CDC can offer an attractive alternative for employers that are looking to support a higher expected pension income at retirement for their employees, without increasing costs. Employers therefore face an important question: does a DC pension arrangement still deliver the best outcomes for my employees, or could a CDC pension arrangement provide a stronger offering?
This article was first published by REBA. |
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