The government has launched a consultation on a new way of drawing pension benefits, adding yet another set of initials to the ever-expanding pension landscape.
What Is a Collective Defined Contribution (CDC) Pension?
Unless you work for Royal Mail, you may be unfamiliar with Collective Defined Contribution (CDC) pension schemes. At their core, CDC schemes sit somewhere between traditional defined benefit and defined contribution pensions.
How CDC Compares to Other Pension Types
CDC pensions can be thought of as a halfway house between:
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Defined Benefit (DB) schemes, which provide guaranteed benefits (typically linked to final or average salary) funded by variable employer contributions.
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Defined Contribution (DC) schemes, which are funded by fixed contributions but deliver variable retirement outcomes depending on investment performance.
CDC schemes combine elements of both. Contributions are fixed, as with DC schemes, but benefits are targeted rather than guaranteed. Investment and longevity risks are pooled across members, similar to a DB arrangement.
Why CDC Has Struggled to Gain Traction
Over time, DB schemes have become largely confined to the public sector. In the private sector, variable employer contributions became increasingly expensive and unpredictable, particularly following prolonged periods of low interest rates.
DC schemes are now the norm in private sector pensions, with their growth accelerated by the introduction of automatic enrolment 13 years ago.
Royal Mail’s CDC scheme, first announced in 2018 and finally launched six years later, remains the only CDC scheme operating in the UK. One reason is scale: CDC works best where there is a large workforce, allowing effective pooling of investment and mortality risk. Most large private sector employers moved from DB to DC many years ago and see limited benefit in another major overhaul of pension provision.
Renewed Government Interest in CDC
Despite limited take-up so far, both the current and previous governments have been keen to encourage CDC schemes. The current Pensions Minister, Torsten Bell, recently told the Financial Times:
“We should be confident that this will play a significant part in our future pension system.”
His comments coincided with the publication of a consultation paper on a new concept — retirement CDC schemes.
What Is a Retirement CDC Scheme?
The proposed retirement CDC model differs from existing pension arrangements in several important ways.
Key Features of Retirement CDC
Under the proposals, retirement CDC schemes would:
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Only accept transfers from members of other pension schemes who are approaching or at retirement.
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Consist solely of non-contributing pensioner members.
As with other CDC arrangements, benefits would be targeted rather than guaranteed. The government believes this approach could deliver higher overall returns than traditional drawdown strategies by pooling investment and longevity risk.
In addition, legislation currently progressing through Parliament will require pension schemes to provide Guided Retirement, which may further encourage the adoption of CDC solutions in the future.
What This Means for Those Nearing Retirement
Retirement CDC schemes remain several years away from becoming a practical option. In the meantime, anyone approaching retirement faces an increasingly complex set of choices when deciding how and when to draw pension benefits.
Speak to Chartwell Wealth Management
With new pension structures under consultation and retirement options continuing to evolve, professional advice remains the starting point for making informed decisions. Understanding how different pension arrangements align with your income needs, risk tolerance and long-term plans is essential.
If you are approaching retirement and would like help navigating your pension options, please contact Chartwell Wealth Management. Our advisers can help you optimise your retirement income strategy with confidence and clarity.
Important Information
The value of investments and the income from them can fall as well as rise, and investors may not get back the amount originally invested.
