With the collective defined contribution (CDC) pensions landscape being expanded to unconnected multiple employers from 31 July 2026, CDC is the acronym on everybody’s lips.
As a reminder, CDC is a defined contribution (DC) trust-based pension scheme – with a twist! CDC pools employer and member contributions into a collective fund rather than allocating them to individual pots for members, which enables diversification and long-term investment.
Members receive a target pension income for life from the scheme, but the pension is not guaranteed as it is based on the assets in the CDC scheme, so it may rise or fall depending on funding levels and investment performance.
Why do we need CDC?
Pensions inadequacy is a harsh reality facing many future pensioners, but some employers have been burnt by the funding uncertainties of defined benefit (DB) pension schemes.
CDC is often presented as bridging the gap left by the decline of DB provision while addressing concerns about the adequacy of traditional defined contribution (DC) outcomes.
The appeal lies in CDC’s potential to improve retirement outcomes for members while maintaining cost certainty for employers.
For members, pooling assets allows schemes to remain invested in growth assets for longer, potentially delivering better outcomes relative to individual DC arrangements through economies of scale and longevity pooling.
CDC schemes may also offer a simpler retirement journey in both the ‘wealth building’ accumulation phase – in which trustees make investment decisions – and the ‘income drawing’ decumulation phase, in which members receive an income directly from the scheme in retirement rather than having to navigate (and pay for) annuity purchase or drawdown themselves.
For employers, CDC offers fixed contribution costs. If benefits are not going to be as expected, the employer does not legally have to change this, meaning employers avoid the balance-sheet volatility associated with DB schemes while still providing a more stable outcome than DC schemes.
Is this all too good to be true?
CDC, like any pension scheme structure, is not without risk.
The most significant issue is the absence of guarantees. Unlike DB, CDC pensions may be reduced if scheme investments underperform, creating communication and expectation management challenges for trustees and employers, and potential cashflow problems for members.
There are also intergenerational fairness questions. Different cohorts may be affected differently by investment performance and benefit adjustments over time.
Governance is another consideration. CDC schemes require robust actuarial modelling and strong oversight to ensure sustainability and member confidence.
Why are we thinking about this now?
Royal Mail launched the first-ever CDC on 7 October 2024, and the initial outlook looks good. It provided an alternative to DB for Royal Mail and is expected to provide members with a better retirement than individual DC.
It has been reported that members received a pension increase of 2.6% above Consumer Price Index inflation during the first year.
There is, understandably, an appetite to expand the CDC regime. With effect from 31 July 2026, unconnected multiple employers will be able to join the same CDC arrangement without having to set up their own scheme.
This opens the door to two broad models: commercial schemes and sector-specific schemes.
Commercial CDC may develop in a way that resembles the existing DC master trust market, widening access for employers who would not otherwise establish a stand-alone CDC scheme.
Sector-based models may be especially attractive in industries with high workforce mobility, such as retail and social care. A CDC structure could help address the buildup of multiple small pension pots as workers move between employers but remain within the same industry.
Retirement-only CDC might be offered as a default pension benefit solution under the member’s own scheme, or members may be transferred into an external scheme to access a retirement-only CDC. This would offer an alternative option at retirement beyond annuitisation or drawdown.
Is the future bright?
For the government and policymakers, CDC is one cog in the machine to improve retirement adequacy and support productive long-term investment.
For the market, the key test will be whether wider CDC can translate into viable, well-governed products that employers will adopt and members will trust.
The next few years will be critical to determine whether CDC becomes a meaningful third way alongside, or potentially replacing, traditional DB and DC.
Beth Brown is a partner and Sally MacCormick is a senior associate at Arc Pensions Law.
