Collective Defined Contribution schemes update

The last couple of months have seen a flurry of developments in the world of Collective Defined Contribution (CDC) schemes. This is a new type of pension that combines many attractive features of Defined Contribution (DC) schemes (such as fixed contributions) and Defined Benefit schemes (such as a stable income in retirement).

The first UK CDC scheme, operated by the Royal Mail, was launched in October last year. Whilst this is positive for the 100,000 employees who have already joined, CDC isn't available more widely due, in part, to the scale that is needed – only very large employers have sufficient staff for the risk sharing elements to be effective.

Recent developments look to change this and enable other organisations to benefit, including those in the housing sector.

Single employer or multi-employer schemes?

The regulation that enabled the Royal Mail CDC scheme to be set up was designed for the Royal Mail but could potentially be used by other large single employers. However, for the risk sharing to be effective, the CDC scheme needs to achieve scale – potentially at least 5,000 employees - putting a single employer scheme out of reach for most employers.

New regulations are needed to enable groups of smaller and unconnected organisations, such as industry groups, like-minded employers, or commercial organisations, to band together to form multi-employer CDC schemes.

What's changed?

Advent of multi-employer regulations

At the LCP DC Pensions Conference at the end of April, the Pensions Minister re-emphasised his and the government's commitment to CDC schemes and gave a statement that confirmed multi-employer CDC regulations would be released in the autumn.

This means organisations planning multi-employer schemes, including several LCP clients, can press forward with getting the regulatory approval needed to establish their CDC schemes, and opens the way for the first multi-employer schemes to launch in 2027.

TPT announce launch of their CDC scheme

Shortly afterwards, TPT announced that it would be launching a multi-employer CDC scheme. This is expected to be open to housing associations and available from April 2027.

We are aware of other organisations also developing CDC offerings: details of these should be announced in the coming months.

CDC decumulation options in the Pensions Bill

This month's Pensions Bill introduces new Guided Retirement requirements. These mean that from as early as 2027, existing DC schemes will need to offer a decumulation solution “designed to provide a regular income” that meets the “needs and interests” of members.

Especially in industries where employees have moderate incomes, we expect this will mean DC trustees and sponsoring employers will need to consider in detail whether CDC or other similar solutions should be offered to best meet member needs.

What’s next?

We believe the housing sector is well-placed to benefit from multi-employer CDC schemes. Many of our clients tell us they want to offer better pensions to their employees but are unable to afford the level of contributions this would require to a DC scheme and do not have the appetite to build up additional defined benefit risks.

A well-designed CDC scheme could bridge this gap, and recent developments could soon make this a reality.