As UK pension provision shifts increasingly away from defined benefit (DB) schemes, collective defined contribution (CDC) plans could be an attractive option for employers looking at closing existing DB schemes in order to have greater certainty and control over costs.
It could also appeal to employers currently providing DC arrangements which are interested in offering their employees an attractive remuneration package, recognising that current trends in DC saving mean that many are unlikely to achieve adequate retirement outcomes.
From a member perspective, projections suggest that CDC could provide higher and more predictable incomes in retirement, compared to individual DC. However, there are challenges ahead as work on design of CDC schemes continues, bringing them closer to a reality in the UK landscape, with The Pension Regulator’s (TPR’s) authorisation process now in place.
A Pension Policy Institute (PPI) briefing note, CDC: International Insights, published in June 2022, drew on international lessons to highlight the key considerations and challenges facing those responsible for design of CDC schemes in the UK, while recognising that the UK’s CDC legislation and broader pensions landscape differ considerably from existing CDC systems.
Four core areas were identified, including: establishing fair and transparent processes for valuations and benefit adjustments; careful consideration of the distribution of risks across cohorts to ensure intergenerational fairness; sustainability of CDC schemes within the UK’s system of voluntary membership, compared to international examples in which participation is mandatory; and questions around contributions, both in terms of the level and the way in which they are converted into future benefit entitlement.
TPR’s Code of Practice for CDC schemes helps to shed some light on these challenges, providing much greater detail and guidance on the expectations for schemes seeking authorisation. This should help employers considering a possible move to CDC to develop a better understanding of whether it is the right option for them, as well as supporting those further along the path with the rigorous work that needs to be done in order to design and administer a scheme that appropriately protects member outcomes.
Lauren Wilkinson is senior policy researcher at the Pensions Policy Institute