Collective defined contribution (CDC) pension schemes are coming to the UK.
The rulebook for multi-employer CDC schemes comes into force at the end of this month, and the Pensions Regulator will soon open its application process for new providers – with TPT Retirement Solutions expected to be one of the first to apply.
Retirement-only CDC rules will follow next year, coming into force in 2028 to align with the guided retirement regime.
These developments have coincided with significant interest in the model, according to recent industry surveys – but not all polling shows pensions industry professionals to be united behind the development.
Improving outcomes: the ‘why’ for CDC
Consultancy firm LCP polled attendees at a recent webinar to find out what the drivers were for interest in CDC. Improving retirement outcomes and the member experience were the principal attractions.
“The greatest interest in CDC comes from its potential to improve both incomes and member experience through retirement without requiring higher contributions.”
Some 29% of respondents were most excited by CDC’s potential to improve retirement outcomes without increasing existing pension spend, while 25% highlighted its ability to improve the retirement experience for defined contribution savers.
Retirement-only CDC was identified as the most exciting development by 24%, compared with 17% for whole-of-life CDC.
Steven Taylor, partner at LCP, said: “What stands out from the polls is that sponsors and trustees are laser-focused on outcomes. The greatest interest in CDC comes from its potential to improve both incomes and member experience through retirement without requiring higher contributions.”
Gallagher’s respondents were divided over which form of CDC they preferred. Nearly one-third (32%) favoured whole-life CDC, 22% preferred retirement-only arrangements, and the largest group, 36%, found both models equally appealing.
LCP’s second poll also indicated that further information would be needed to turn interest into action. Some 41% wanted to hear more from organisations designing commercial CDC products, 24% sought additional government and regulatory guidance, and 14% wanted examples from early adopters.
Three-quarters of decision makers eyeing CDC
Separate research released last week by Gallagher found that more than three-quarters of UK pensions decision-makers expect to explore CDC schemes within the next three years.
A survey of 250 employers, trustees and pensions professionals found 76% planned to consider a CDC option over that period, while 52% said they would be comfortable being an early adopter.
“Employers and trustees want to see more test cases, and they want greater clarity on regulation and delivery. Then they want to understand what it really means for their specific workforce.”
Andre Clarke, Gallagher
More than 80% of respondents from larger companies expected to explore CDC, compared with 51% among those working with companies employing fewer than 250 people.
Asked what would increase their confidence, 39% wanted clearer regulatory guidance, 38% sought proven results from early adopters and 37% pointed to positive feedback from unions or employee representatives.
Andre Clarke, senior vice-president for investment consulting at Gallagher, said: “There’s a clear difference between exploring CDC as an option and taking the steps to introduce it into an existing benefits package. Employers and trustees want to see more test cases, and they want greater clarity on regulation and delivery. Then they want to understand what it really means for their specific workforce.”
More than half of Gallagher’s respondents (53%) said they would be most likely to consider a multi-employer or master trust CDC arrangement, compared with 34% who would favour a single-employer model.
Some yet to be convinced on new model
The findings contrast with Sackers polling published last week, in which 61% of respondents said they were not confident CDC would gain significant traction.
The law firm surveyed 79 respondents from across the pensions industry, and found that explaining how the model works could be a major obstacle. Almost half of respondents (48%) said key features would be challenging to communicate, while 26% identified the possibility of retirement incomes falling as the most difficult issue to explain to members.
Andrew Worthington, partner at Sackers, highlighted that the biggest challenge facing proponents of CDC was not necessarily the model itself but rather familiarity with how it works.
“As a new approach for the UK pensions market, building confidence will take time, like any innovation,” Worthington said.
David Piltz, chief executive of Gallagher’s benefits and HR consulting division, said: “The challenge is converting that interest into adoption. If a firm is unsure about CDC, it’s likely due to a mix of factors: a low number of test cases, competing business priorities, and a hesitance to step out first.”
Royal Mail’s unique CDC structure is currently still the only such pension scheme in operation in the UK. Others are certain to follow over the next few years, but it remains to be seen how widespread the model becomes.
