Lisa Purdy: CDC isn’t a silver bullet, but it is one of the most credible ideas we have right now for tackling the adequacy crisis at scale
If there’s one word that keeps coming up in trustee conversations right now, it’s adequacy.
This is for good reason. Too many people simply aren't saving enough for retirement, and even those who are contributing regularly often don't appreciate just how expensive a "comfortable" retirement has become.
The uncomfortable truth is that we are heading toward a future where a significant proportion of today's workforce will either have to work far longer than they expected, or face retirement with an income that falls well short of what they need. That isn't just a personal problem for individuals, it's a societal one.
A generation retiring in financial difficulty will place greater pressure on public services, from welfare support to healthcare. It also creates knock-on consequences for employers, who may find themselves managing an ageing workforce with limited retirement options. And, inevitably, it will affect future generations too either through fewer job opportunities, higher taxation, or reduced economic resilience overall.
It's against this backdrop that collective defined contribution (CDC) is attracting increased interest.
Why CDC is gaining attention
CDC is being talked about more and more as a potential solution to the adequacy challenge. In simple terms, CDC sits between defined contribution (DC) and defined benefit (DB). Members have a target pension, but unlike DB it isn't guaranteed. However, unlike individual DC, risks and outcomes are shared collectively across the membership.
From a trustee perspective, the appeal is clear. CDC has the potential to deliver more stable and higher retirement incomes than traditional DC arrangements. Although it is worth noting that under CDC annual income has the potential to decrease, so communication and member understanding is key.
There is growing evidence internationally that collective approaches can produce materially better outcomes. Some studies have suggested that CDC‑style models can deliver materially higher outcomes — in the region of 20-40% in certain scenarios — driven by longevity pooling, lower frictional costs and a genuinely long-term investment horizon
That sort of improvement is meaningful. It's not a marginal gain, it's the difference between getting by and retiring with dignity.
A word of caution
That said, there is a concern I'm increasingly hearing: some voices seem to be positioning CDC as primarily a way to reduce pension costs for employers.
Now, employers managing pension spend is a legitimate issue. But if members begin to see CDC as something done to them rather than for them, trust will be fragile from the outset.
The three key areas trustees must focus on
In my view, successful CDC implementation rests on three core pillars: scheme design, communication, and investment strategy. Get these right, and CDC can be transformative. Get them wrong, and it could undermine trust in pensions even further.
1. Scheme design: balancing ambition and realism
Scheme design is where the foundations are laid. Trustees and sponsors need to be clear about what the scheme is trying to achieve and how benefits will be calculated and adjusted over time.
Key questions include:
- What is the target benefit level?
- How will pensions be adjusted if funding levels move up or down?
- How will fairness between generations be managed?
- What governance structures are needed to ensure decisions remain robust and defensible?
This is where CDC can either build credibility or invite criticism. The rules need to be clear, transparent, and built with long-term sustainability in mind. Intergenerational fairness – and the management of risk transfers between cohorts – is particularly critical. The scheme must not create winners and losers based purely on timing.
2. Communication: building trust without overselling certainty
Communication in CDC is not just important, it is absolutely central. Members need to understand that CDC offers a target income, not a guarantee. This means that annual income could go down. But they also need to feel confident that the target is meaningful and that the scheme is professionally managed.
The danger is twofold: overselling CDC as "DB without the cost," or underselling it so much that members fail to engage or understand that their pension could go down. Trustees must strike a careful balance: honest about uncertainty, but clear about the potential benefits of collective risk-sharing.
Good communication should focus on outcomes: what members might reasonably expect, what could change, and why. It should also reinforce that CDC is designed to reduce volatility compared to individual DC decision-making, not eliminate it entirely.
Ultimately, member trust won't come from promises, but from consistency, transparency, and evidence that the scheme is being governed in members' long-term interests
3. Investment strategy: unlocking the real value of CDC
CDC only works if the investment strategy matches the structure. One of CDC's greatest strengths is the ability to invest for the long term, without being forced into overly cautious de-risking approaches at the point of retirement.
Unlike individual DC, where members often shift into low-return assets pre-retirement, CDC can maintain growth exposure for longer. This can improve expected returns and smooth outcomes over time.
But that requires strong governance, clear risk frameworks, and a willingness to manage volatility responsibly rather than avoid it altogether. If CDC investment ends up looking like a conservative DC default fund, we lose a major part of its advantage.
All of this places a significant responsibility on trustees to set clear beliefs, objectives and risk tolerances and to hold advisers and managers firmly to account.
Final thoughts
CDC isn't a silver bullet, but it is one of the most credible ideas we have right now for tackling the adequacy crisis at scale, without necessarily increasing employer cost. As trustees, we should welcome the prospect, but we should also be cautious about how it is framed and implemented.
If CDC is designed properly, communicated clearly, and supported by a genuinely long-term investment approach, it has the potential to materially improve retirement outcomes for thousands of people.
And at a time when too many are heading toward working longer or retiring poorer than expected, that's not just desirable – it's an opportunity all of us in pensions simply cannot ignore.
Lisa Purdy is a professional trustee at Capital Cranfield
