CDC – the next stage in the evolution of CDC

October has been a key month in the development of collective defined contribution pension schemes (CDC schemes). On 7 October, the Royal Mail Collective Pension Plan was launched. 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 second of our series of three blog posts on CDC, we provide an overview of where we are now with the next stage in the development of CDC and look at the Consultation and how it relates to the policy in place for for single or connected employer schemes. We then focus on how it addresses multi-employer complications around sectionalisation, promotion, increases and managing running on as a closed scheme if needed.

Where are we now?

The statutory regime for CDC was outlined in the Pension Schemes Act 2021. The detailed regulations for single employer schemes (the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022) went into force in 2022. CDC became a reality in the UK off the back of that with the recent launch of the Royal Mail Collective Pension Plan.

The next phase for the roll out of CDCs, and the one that might enable this form of pension saving to move from the niche to the mainstream, is to allow unconnected multi-employer schemes. 

What does the proposed legislation say?

The draft Occupational Pension Schemes (Collective Money Purchase Schemes) (Extension to Unconnected Multiple Employer Schemes and Miscellaneous Provisions) Regulations 2025 (the Draft Regulations) will, if brought into law, open the door for schemes to cater to multiple and unconnected employers (akin to the position with automatic enrolment-compliant open market master trusts). where those employers are not connected.

The Draft Regulations set out what:

• a multi-employer CDC scheme must do to:
  • become authorised; and
  • operate effectively under regulatory oversight; and
• happens if changes are required.

What are the next steps for the introduction of unconnected multi-employer CDC?

Subject to the outcome of the Consultation, the Draft Regulations are due to be laid in 2025. The DWP intends to bring the legislation into force as soon as practicable after that. In conjunction, The Pensions Regulator (TPR) will update its code of practice (TPR code of practice ‘Collective defined contribution (CDC)’).

October has already seen a lot of focus on CDC in the pensions industry. This may be joined by growing interest in CDC from certain sectors, industry-wide employer groups and/or from existing or newly formed DC consolidators. Other large employers, perhaps with unionised workforces, may also wish to explore CDC as part of wider pay and reward discussions.

Decumulation only CDC options

It appears that DWP is still grappling with the question of demand for decumulation-only CDC schemes (i.e. CDC schemes which can be chosen as a retirement income delivery option rather than as a savings accumulation option). It therefore did not focus on decumulation-only options in the Consultation.

Instead, the DWP has expressed an appetite to hear from those currently developing or exploring trust-based decumulation-only CDC options. It is particularly interested in items such as scale, promotion and marketing, and entry pricing and charging structures. This is likely to be the area where existing defined contribution master trusts may step in, and we know that a number of them are considering the commercial viability of running CDC options.

The future for CDC in the UK

At this stage, CDC could evolve in a number of directions. The four most likely outcomes are that CDC could:

• remain a rarity in the pensions industry, used by a handful of employers in specific circumstances (akin to the current situation);
• be taken up as a pension savings solution for multiple unconnected employers in certain sectors and/or by industry-wide employer groups, but otherwise remain an atypical form of retirement savings;
• be taken up by current or newly established DC consolidators as an offering to a broader range of employers, in a similar way to the establishment and development of trust-based automatic enrolment schemes following the introduction of employer duties under workplace pension reform; or
• be most commonly encountered as a decumulation-only option, provided by a number of the UK’s existing master trusts and similar providers.