October 2024 has been a key month in the development of collective defined contribution pension schemes (CDC schemes). On 7 October 2024, the Royal Mail Collective Pension Plan was launched. In the same week, the Pensions Minister noted that CDC schemes were “an important addition to the UK pension landscape”.
In line with that sentiment, the next day the Department for Work and Pensions (DWP) published a consultation setting out draft regulations that, if brought into law, will permit the operation of unconnected multiple employer CDC schemes (The Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025 (8 October 2024)’) (the Consultation).
In the first of a series of three blog posts on CDC, we look at how CDC has evolved and what its role might be in a changing UK pensions landscape.
The changing UK pensions landscape
Workplace pension provision in the UK has changed markedly over the past three decades.
Widespread private and public sector DB scheme membership meant many could expect a regular and adequate private income lasting from leaving employment until death. But by 2020, only 12% of private sector employees were active members of a DB scheme.
Defined contribution (DC) scheme membership has increased massively, fuelled by automatic enrolment. There were 26.1 million DC memberships in master trusts alone in 2023. Most of those members are, however, not saving enough to provide an adequate retirement income. According to the IFS, 61% of the middle-earning private sector employees who are contributing to a pension are saving less than 8% of their earnings.
Pension flexibilities, introduced in 2015, saw a 75% decrease in the number of people purchasing an annuity with their DC pension savings.
As a result, millions of people in the UK are not saving enough for retirement and will not have the certainty and security of income from DB scheme membership or an annuity.
What is to be done?
One of the main thrusts of government pensions policy over the past decade has been to focus on value for money in DC schemes. Lowering costs and improving returns would increase the pension pots for savers that rely on DC scheme membership.
Saving more and for longer could also see increased pot sizes. This will be partially addressed by reforms to automatic enrolment (lowering the minimum age from 21 to 18 and removing the lower earnings threshold for contributions). The government could also decide to increase the minimum level of contributions.
These are positive steps for DC savers. But they are unlikely to be enough to deliver the level of pension benefits needed for many to reach comfortable retirement provision.
Is CDC a solution?
A ‘third way’ of pension provision that lies between DB and DC has been the focus of pensions industry debate and government policy for a long time – whether as a Dutch-style pension system, defined ambition or CDC.
A CDC scheme is an alternative pension scheme which is neither a DB scheme nor a traditional DC scheme. Under the current CDC policy, both employer and employee contribute to a collective fund that is, in many ways, similar to a DC scheme.
The key difference with CDC is that the funds are invested collectively with the aim of delivering a target benefit level. The collective fund is shared between members and the collective fund provides members of the CDC scheme regular income on retirement.
This sounds more like DB provision, but the key difference is that the target income level is neither guaranteed nor funded by the employer. If the CDC fund does not meet its investment objectives, benefits will be reduced.
Is CDC the solution?
Will this work in the UK? Is there demand from employers? And what is the government currently proposing?
In tomorrow’s blog post, we’ll focus on the government’s plans to extend CDC from the current single / connected employer provision to (deep breath) unconnected multiple employer whole life CDC schemes.
About the author(s)
Jason Coates is a leading UK pensions lawyer. He helps his clients to respond to the challenges and opportunities they face in operating their pension arrangements, commercially and without jargon.
Ian is a London-based professional support lawyer (PSL) legal director. Ian is a member of our pensions and combined human resource solutions (CHRS) teams. He works with clients to solve their employment and pensions law issues. Ian maintains a particular focus on 'crossover' issues that benefit from his understanding of both areas of law.
Alison advises Trustees on a wide range of pensions matters. Her pensions practice encompasses advisory work, drafting pension scheme documentation and handling discrete projects. She enjoys helping clients find pragmatic solutions to their pensions issues and navigate the ever-changing regulatory landscape.