CDC schemes need a new investment approach

A new chapter in LCP’s CDC’s investment secret series argues that collective defined contribution (CDC) schemes require a new investment playbook — one that moves beyond traditional portfolio metrics and focuses on the pensions members actual experience.

LCP says CDC requires a shift away from maximising return for a given level of portfolio risk, towards designing investment strategies around member outcomes over time. That calls for more innovative approaches to portfolio construction, combining long-term growth with resilience through inflation shocks, market stress and changing economic regimes.

Unlike DB, CDC outcomes are not fixed in advance. Unlike individual DC, outcomes are not determined solely by each member’s own investment experience. Instead, investment returns are shared collectively and feed through into pensions through future increases and, where necessary, reductions.

The chapter argues that this changes how both “risk” and “success” should be assessed. Rather than focusing on short-term market movements or volatility, CDC investment strategies should be judged by how they support expected pensions, downside outcomes, pension stability, inflation resilience and the likelihood of pension reductions.

LCP also highlights that CDC investment strategy should start with the member outcomes the scheme is trying to deliver, then work backwards to the portfolio behaviour and construction needed to support them.

The analysis emphasises that the level of investment risk a CDC scheme can sustain is driven not just by the assets held, but also by the profile of its membership. Schemes with younger demographics can typically absorb market shocks over longer time horizons and tolerate greater asset stress before benefit adjustments are required, while more mature schemes may place greater emphasis on pension stability and downside protection.

LCP argues that there is no single “optimal” CDC portfolio. The appropriate strategy will depend on how schemes balance competing objectives such as pension adequacy, pension stability, inflation resilience and fairness across generations, and how those objectives align with the scheme’s wider benefit design.

Once this balance is defined, portfolio construction should focus on delivering sustainable pension outcomes across a wide range of economic environments. In practice, this is likely to lead CDC portfolios to place greater emphasis on:

• long-term growth assets;
• diversification across economic regimes;
• resilience to inflation shocks; and
• recovery dynamics following market stress.

Steven Taylor, Partner and Head of CDC at LCP, said: “CDC investment strategy is not about avoiding risk; it is about how investment risk is translated into pension outcomes over time. That requires a shift in mindset and a more innovative approach to investment design. The key challenge is building portfolios that can absorb shocks, recover from stress and continue to support sustainable pensions for members over decades.”

Laun Middleton, Partner at LCP, added: “CDC needs a broader investment toolkit than traditional pension investing, drawing on the best ideas from both DB and DC. Long-term growth remains essential, but it must be combined with portfolio designs that are resilient through inflation shocks, market stress and changing economic regimes.

“The challenge for CDC investors is not whether to take risk, but how to build portfolios that can continue supporting member outcomes through decades of uncertainty.”