Lisa Purdy: As trustees, our objective should not be to champion one model over another, but to ensure members have access to well-designed options.
With the first UK collective defined contribution (CDC) schemes now authorised and policy momentum building around decumulation defaults, CDC pensions have moved from theory to reality, offering a new way of thinking about retirement income.
As trustees, we are often asked how CDC will shape the future of workplace pensions and, if so, which model is likely to work best.
While the key distinction between the two main models is relatively simple – retirement CDC focuses only on how savings are converted into income, while whole-of-life CDC reshapes the entire pension journey – how each goes about achieving these different objectives requires a deeper dive.
What is retirement CDC?
Retirement CDC focuses on the decumulation phase of pension saving. Members build up their pension savings in a traditional defined contribution (DC) arrangement during their working lives. When they reach retirement, instead of purchasing an annuity or managing drawdown themselves, they transfer their savings into a CDC arrangement that provides an income for life.
The key feature is that investment and longevity risks are shared collectively among retirees. Members receive a target income rather than a guaranteed benefit, meaning pensions can increase or decrease depending on the performance of the collective fund.
In simple terms, retirement CDC aims to turn an individual's pension pot into a more efficient and sustainable retirement income.
What is whole-of-life CDC?
Whole-of-life CDC operates throughout both the accumulation and retirement phases. Members and employers contribute to a collective fund during the member's working life, and the same arrangement continues into retirement.
Rather than each member having an individual account, benefits are built up collectively and members receive a target pension based on contributions and scheme rules. Investment returns and longevity experience are shared across generations of members.
This approach resembles some of the collective pension systems seen in countries such as the Netherlands and Canada, where risk-sharing occurs throughout a member's entire pension journey.
The advantages of retirement CDC
From a trustee perspective, retirement CDC has several attractive qualities.
- Turing savings into income: This addresses one of the biggest challenges facing modern pensions: turning savings into income. Many DC members reach retirement with little experience of managing large investment portfolios or deciding how quickly to withdraw money. Drawdown offers flexibility, but it also places significant responsibility on individuals.
- Retirement CDC can provide a regular income without requiring members to become investment experts. The collective structure allows members to benefit from professional investment management while reducing the risk of running out of money in later life.
- Higher expected incomes than a traditional annuity: This is because benefits are not guaranteed. Investments can remain invested in growth assets for longer, schemes can potentially generate stronger long-term returns. The collective pooling of longevity risk also creates efficiencies that are difficult for individuals to achieve on their own. Although, I'd highlight depending on annuity prices this may not always be the case.
- Easier to introduce into the current pensions landscape: Employers can continue using familiar DC arrangements during employees' working lives while offering CDC as a retirement option. This avoids the need for a wholesale redesign of workplace pension provision.
- Can quickly build scale through guided retirement defaults: If retirement CDC becomes an accepted default decumulation option, schemes could build significant scale in a relatively short period. Greater scale can improve governance, reduce costs and support more efficient investment strategies, ultimately benefiting members through better retirement outcomes.
- Members retain flexibility: Individuals can still accumulate savings in DC arrangements and decide whether CDC is the right retirement solution for them when the time comes.
The advantages of whole-of-life CDC
Whole-of-life CDC offers a different set of strengths.
- Pool risks throughout a member's entire career: This is perhaps its greatest advantage. Investment gains and losses are shared across a much larger population and over a longer period. This can smooth outcomes and reduce the impact of market volatility on individual members.
- Greater allocation to productive growth assets: The longer investment horizon can support a greater allocation to productive growth assets. Because the scheme is managing cashflows collectively, it can sustain higher allocations to growth assets without forcing individuals to de-risk at retirement. Over time, this may enhance expected returns.
- A simpler member experience: Instead of navigating separate accumulation and decumulation products, members participate in a single pension arrangement from joining the workforce through to retirement. From a governance perspective, a single collective framework can provide a clearer retirement proposition. Members know from the outset that the scheme is designed to deliver an income in retirement rather than simply accumulating a pot of money.
- Provides an income for life: There is an argument that whole-of-life CDC better aligns with the original purpose of pensions – to provide an income for life. By focusing on retirement income rather than individual account balances, whole-of-life CDC shifts attention back to the end goal rather than the size of a pension pot at any particular moment.
- Why neither option will be right for everyone
Despite the advantages of both approaches, it is important to recognise that neither retirement CDC nor whole-of-life CDC will suit every member.
Some individuals place a very high value on flexibility. They may want to access their pension savings at different times, leave substantial inheritances, make large withdrawals, or vary their retirement spending significantly. Traditional DC arrangements are often better suited to these objectives.
Others may prefer the transparency of having an individual account balance that they can monitor and control directly. There are also practical considerations. CDC pensions provide target benefits rather than guarantees. While this allows schemes to pursue higher expected returns, members must be willing to accept that pension levels may rise or fall over time. The success of both models will depend heavily on communication. Members must clearly understand that benefits are targets, not guarantees – particularly in periods where adjustments may be downward.
Final thoughts
In reality, the future pension landscape is unlikely to involve a simple choice between retirement CDC, whole-of-life CDC and traditional DC. Each has its own strengths and is likely to appeal to different employers and members.
DC provides flexibility and individual control. Retirement CDC offers an efficient way to convert pension savings into a lifelong income, while whole-of-life CDC provides the benefits of collective risk-sharing throughout a member's pension journey.
As trustees, our objective should not be to champion one model over another, but to ensure members have access to well-designed options.
The positive development is that members are gaining more choice. By expanding the range of retirement solutions available, both forms of CDC have the potential to improve outcomes and strengthen the UK's pension system for the future. That can only be a positive step forward.
Lisa Purdy is a professional trustee at Capital Cranfield
See also:
