A majority of pensions professionals are not confident that collective defined contribution schemes (CDC) will gain significant traction, despite government moves to expand the market, according to polling by Sackers.
The law firm surveyed 79 respondents from across the pensions industry, as the government seeks to extend the framework beyond single and connected employer schemes to allow unconnected multi-employer schemes and retirement-only CDC arrangements.
However, the survey suggested 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.
CDC schemes combine fixed employer contributions with collective investment and risk sharing, targeting a regular retirement income without giving employers the open-ended funding commitments associated with defined benefit (DB) schemes.
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. “It’s also notable that many respondents highlighted the possibility that retirement income could reduce as a key concern. In practice, retirement incomes under defined contribution [DC] structures are already uncertain, fluctuating with market performance and individual decisions.
“CDC has the potential to become an important third option alongside DB and DC. It gives employers certainty over contribution costs while giving members the benefits of collective investment, risk pooling and the prospect of a more predictable retirement income than many individuals can achieve through traditional DC arrangements.”
Worthington said the experience of similar overseas arrangements showed that the model could deliver good outcomes, but wider UK adoption would require continued policy support, workable regulation, and more practical experience.
He welcomed the government’s proposed easement from its guided retirement requirements where schemes are actively considering retirement CDC as their default option. He also pointed to additional flexibility intended to help new unconnected multi-employer schemes navigate the authorisation process.
“This momentum will need to continue as CDC cannot succeed through single employer demand alone; it needs policy leadership to build confidence and encourage wider adoption,” Worthington said.
Over three-quarters of UK pensions decision-makers plan to explore Collective Defined Contribution in next three years
- Around half (52%) of respondents were comfortable being an early adopter
- 51% of companies with less than 250 employees say they expect to explore CDC within the next three years. This rises to over 80% among larger companies
21st JULY – Interest in Collective Defined Contribution (CDC) pensions is reaching a tipping point, with more than three quarters (76%) of UK pensions influencers and decision-makers set to consider a CDC option within the next three years.
That’s according to Gallagher’s CDC Report, which examines industry confidence levels, the barriers to implementation and the path to scale for CDC pension schemes in the UK.
The research, which surveyed 250 employers, trustees and pensions professionals, arrives at a time when multi-employer CDC schemes are nearing regulatory approval in the UK.
Interest in the CDC model is growing, with around half of respondents (52%) saying they would be comfortable being an early adopter.
Interest in CDC is growing but confidence is a barrier
Larger employers are leading the way. Among respondents working with companies of fewer than 250 members, 51% expect to explore CDC within the next three years. This rises to more than 80% among respondents from companies.
The findings indicate that larger employers may be better placed to assess CDC at this stage. Beyond the natural barrier of cost, they are more likely to have specialist pensions support and strong internal governance structures. Smaller companies may face greater barriers around governance capacity and internal resource.
Notably, many organisations are hesitant to move first when it comes to adopting CDC. When asked what would increase their confidence, respondents cited clearer regulatory guidance (39%), proven results from early adopters (38%) and positive feedback from unions or employee representatives (37%).
Andre Clarke, Senior Vice President, Investment Consulting at Gallagher, said:
“In a very short period, the conversation around CDC has moved forward at blinding speed. The Royal Mail scheme gave the UK market its first live example. It is no longer possible to think of CDC as a niche actuarial idea; it is stepping into the spotlight, demanding close attention.”
“However, our research paints a more nuanced picture. 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. It is here where an experienced consultant can help firms assess their options in the CDC market and decide which arrangements could suit their workforce best.”
Multi-employer models lead the way
The availability of practical access routes will determine the rate of CDC adoption. More than half (53%) of respondents say 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.
Sector-wide arrangements also saw significant interest, with 86% saying they would find a sector-wide CDC scheme appealing. The findings point to a preference for scalable CDC models that can be put into action across a broader range of organisations.
A role for both whole-life and retirement CDC
The research also challenges assumptions about how the CDC market may evolve. While retirement-only CDC arrangements have received a high amount of attention, the majority of the respondents preferred whole-life CDC. Nearly one third (32%) favour whole-life CDC, compared with 22% who favour retirement-only arrangements.
The largest group (36%) see both models as equally appealing, suggesting many organisations are open-minded about how CDC could be delivered in practice and recognise that their roles are not mutually exclusive.
David Piltz, CEO of Gallagher’s Benefits & HR Consulting Division, says:
“For decades, employers and pension professionals have struggled with one question: how can we offer good retirement outcomes for employees without putting too much risk on the balance sheet? A Collective Defined Contribution scheme offers a potential alternative. It is an aspirational model, and one that could offer more predictable outcomes than a traditional Defined Contribution scheme and without the high-risk guarantees of a Defined Benefit plan.
“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. The science, regulations, and guidance are in place, but the industry needs to communicate CDC in a way that everyone can understand. That is the only way that the sector will translate the growing interest into this emerging area into real and tangible action.”
