Communicating variable benefits in CDC

Instead, CDC schemes aim to provide a target level of retirement income which may increase or decrease depending on investment performance, demographic experience and the scheme's overall financial position.

For trustees, this is not simply a communications challenge. It is a behavioural one. Members do not always interpret information rationally. Their decisions are shaped by emotions, assumptions and cognitive biases. Understanding these behavioural tendencies is essential if trustees are to build confidence in CDC and maintain trust when outcomes change.

What trustees say and what members hear

Trustees may carefully explain that CDC provides a target pension rather than a guarantee. However, members can still interpret projected income as a promise.

This is often the result of anchoring bias, whereby individuals place excessive weight on the first number they encounter. If a member receives an illustration showing an expected pension of £8,000 per year, that figure can become their reference point. Future changes are then judged relative to this anchor, regardless of accompanying caveats.

Trustees should avoid presenting a single income projection in isolation and instead present a range of possible outcomes; use scenario modelling to illustrate different market conditions; reinforce consistently that illustrations are targets, not promises; and use visual illustrations showing how pensions may change over time.

Actions such as these will mean members should become anchored to the concept of variability rather than a single pension figure.

Losses hurt more than gains feel good

One of the best-established findings in behavioural finance is loss aversion. People feel the pain of losses far more strongly than the pleasure of equivalent gains.

Therefore, a member who receives a 5% pension increase may appreciate it briefly. However, a subsequent 5% reduction is likely to feel significantly more painful. This presents a particular challenge within CDC because benefit adjustments are a legitimate feature of the model.

Trustees cannot remove the emotional impact of benefit reductions, but they can reduce the sense of shock by communicating from the outset that pensions can rise and fall; avoiding overly optimistic messages during periods of strong performance; explaining adjustment mechanisms before they are needed; and providing context around decisions and sufficient notice where possible.

Members are generally more accepting of outcomes that they have been prepared for in advance. The worst time to explain benefit variability is when a reduction is being announced.

The importance of framing

Behavioural finance shows that the way information is presented influences how it is received. For example, members may react differently to the statement that "there is a risk that pensions could fall in some circumstances" compared with "the scheme is designed to adjust benefits when necessary to support long-term pension outcomes for all members".

Both statements describe the same reality but focus attention in different ways.

Trustees should explain why adjustment mechanisms exist; connect decisions to member outcomes rather than technical funding measures; demonstrate how fairness between generations is maintained; and use plain language rather than pensions jargon.

When members understand the purpose behind decisions, they are often more willing to accept them.

Mental accounting and pension security

People tend to separate their finances into different mental categories. Many retirees view pension income as fundamentally different from savings or investments because it is used to meet everyday living costs. As a result, changes to pension income can feel particularly significant.

Trustees should begin setting expectations long before retirement through pre-retirement education sessions; illustrations showing how benefit changes may occur over time; retirement planning tools that incorporate different scenarios; and regular reminders that CDC provides a target income rather than a fixed entitlement.

Helping members understand variability before retirement reduces the likelihood that adjustments later feel like a breach of expectations.

Recency bias and market performance

Members often place too much weight on recent events. Following several years of strong returns, they may assume good outcomes will continue indefinitely. After periods of weak performance, they may become overly pessimistic. This is known as recency bias.

For trustees, the risk is that members begin judging the scheme solely on recent outcomes.

Trustees can encourage a longer-term perspective by publishing information covering multiple market cycles; focusing on long-term performance data rather than annual results; including historical examples demonstrating periods of both growth and decline; and reinforcing that CDC is designed to operate over decades.

CDC should be judged over the long term, and trustee communications should consistently reflect this.

Confirmation bias

People often favour information that supports their existing beliefs. A member who views CDC as a guaranteed pension may discount references to variability. A sceptical member may focus only on risks.

Trustees should test whether communications are actually understood through member surveys; focus groups; user testing of materials; and things like webinars and Q&A sessions.

Success should be measured not by what has been communicated, but by what members have understood.

Building trust through transparency

Research consistently shows that people are more willing to accept difficult outcomes when they trust the decision-making process. For CDC schemes, maintaining trust requires transparency about governance as well as outcomes.

Trustees should explain how decisions are made; the role of actuarial and investment advice; how member interests are protected; and how fairness between cohorts is assessed.

Members may disagree with a decision, but they are more likely to accept it if they believe the process was fair.

Conclusion

The greatest communication challenge in CDC is not explaining the mechanics of the scheme. It is helping members understand and accept uncertainty.

Anchoring, loss aversion, framing effects, mental accounting, recency bias and confirmation bias all affect how members interpret pension information. These behaviours cannot be eliminated, but they can be anticipated and managed.

For trustees, effective communication must therefore go beyond disclosure. It should be viewed as a core element of governance and risk management. The most successful trustee boards will be those that recognise that member understanding and trust are not merely desirable outcomes. They are essential to the long-term success of CDC itself.

Lisa Purdy is a professional trustee at Capital Cranfield. Her views are her own and do not necessarily represent those of Capital Cranfield.