The Government claims that millions of workers could see their pensions “increase by up to 60%” as new regulations for “Collective Defined Contribution” (CDC) schemes are set to be laid. But is this realistic? And what are CDCs… and what are the potential advantages and drawbacks?

Towards the end of October, the Government issued an update on its plans to see the roll out of Collective Defined Contribution” (CDC) schemes.  These are a new type of pension scheme in the UK, sometimes also referred to as “Collective Money Purchase Schemes”, and they were introduced by the Pension Schemes Act 2021.

This move builds on the progress made by the UK’s first CDC scheme, the Royal Mail Collective Pension Plan, which already has over 100,000 members and – says the Government ­– “reflects growing demand for pensions that deliver a lifelong income”.

So how do they work?

Unlike Defined Contribution (DC) schemes, CDCs pool pension schemes into a collective fund – which the Government claims will “give workers regular pension payments for life, more security and higher average retirement incomes throughout retirement when compared to individual pension pots”.

The new regulations will allow the expansion of CDCs to more employers. The move is also tying into the Government’s push to persuade more pension funds to invest in the UK.

The pension industry’s opinion on CDC schemes has so far been largely positive, with major associations and consultancy firms highlighting their potential to offer higher and more stable retirement incomes than traditional Defined Contribution (DC) plans.

However, the industry also acknowledges significant challenges – including the complexity of communicating the non-guaranteed nature of CDC benefits to savers and the need for strong governance.

Shared risks

Hymans Robertson, for instance, found that there is growing backing for CDC amongst UK corporate pension decision-makers, with 91 per cent of those responding saying that they are now likely to consider CDC or similar schemes for their business… a figure that has moved up from 81 per cent in 2024.

“Collective defined contribution (CDC),” they say, “presents an opportunity to deliver better pensions for millions of savers. We believe CDC has a major role to play in the future of UK retirement savings.”

Chintan Gandhi, Partner and Head of Collective DC, Aon, adds: “These regulations are a huge step for UK CDC. They will open up the market to multi-employer whole-life CDC schemes, including those provided by master trusts, enabling them to meet the needs of all employers and the self-employed – regardless of the size of their workforce or their contribution budgets.”

Minister for Pensions Torsten Bell said: “Too often people approaching retirement are left navigating complex choices and shoulder risks they shouldn’t have to face alone.

Collective pensions offer savers a new option that in many cases will be a better deal, one where risks are shared, returns are smoothed and retirement incomes are stronger and paid for life.”

But what are the pros and cons? According to the Government’s own website:

The advantages of CDC schemes

• Retirement in a single package: Like in defined benefit schemes, members of CDC scheme both build up (accumulation) and receive a pension (decumulation) in the same scheme.
• An income without a risk premium: As CDC schemes do not guarantee an income, they do not have the additional cost of securing that guarantee.
• Longevity risk sharing: People managing their own pension pots risk underspending (dying with unused funds) or overspending (running out of money). CDC schemes reduce these risks by paying pensions based on average life expectancy across the scheme’s members.
• Investment strategy: It is argued that CDC schemes can take a longer-term investment strategy than defined contribution schemes because they have a mix of members – some still contributing and building up their pensions and other receiving a pension income from the scheme.
• No continuing liability for employers: CDC schemes allow employers to offer a pension scheme, that provides an income in retirement like a defined benefit scheme, without needing to further fund the scheme if it does not have enough assets to pay the pensions it has promised.

The disadvantages of CDC schemes

• Falling incomes: Pensions in CDC schemes are not guaranteed which means that the pensions paid to members can fall.
• Communications: CDC schemes are more difficult to explain than defined benefit schemes (which pay a promised benefit) or defined contribution schemes (where a saver builds up a pension pot).
• Intergenerational risks: There is a perceived risk of CDCs having the potential for generational unfairness. For example, if funds contributed by an earlier generation are used to pay higher pensions to a later one or if a later generation needs to replenish funds used by an earlier one. This is seen as less of an issue for CDC schemes in the UK due to the way schemes are required to be designed.
• Some members will be worse off: A consequence of longevity risk is that those who die younger effectively subsidise the pensions of those who live longer. This means that some members may be worse off than if they were in a defined contribution scheme with their own pension pot.

This article is intended for information only and does not constitute advice.