Explore answers to commonly asked questions about pensions.
Curious? Your questions answered
Yes. CDC and DC can be complementary, offering different income patterns in retirement to suit diverse saver profiles and needs.
Under the proposed reforms, surpluses in DB pension schemes could be:
Returned to sponsoring employers for business investment
Used to enhance member benefits, such as discretionary pension increases
Allocated to support Defined Contribution (DC) pension plans
These uses would be subject to safeguards to ensure the security of members' benefits.
The Pensions Administration Standards Association (PASA) Accreditation programme is an independent assessment of compliance with their standards, which cover a broad range of administration activities. You can check if your administrator has been accredited at the PASA website.
When choosing a pensions administrator, consider whether they regularly seek feedback from members, whether they use technology to enhance members’ experiences, whether they proactively look after members’ data, and what accreditations they have been awarded.
For sponsors, buying-out a closed defined benefit pension scheme can remove balance sheet risks and completing the wind-up process will remove the ongoing expenses of running the scheme.
Key areas to consider include:
Solvency metrics: How does the insurer’s capital buffer compare to industry benchmarks?
Risk exposure: What are the key risks in their investment and reinsurance strategies?
Ownership model: Does their structure support long-term financial resilience?
A Collective Defined Contribution (CDC) pension scheme combines the structure of a DB scheme with the cost certainty of a DC scheme.
Benefits are funded by a regular and fixed contribution rate, but the investments are managed collectively. This allows members to share risk and achieve better outcomes at retirement than traditional DC and potentially DB arrangements.
Members accrue a target benefit, in the form of a pension (that can be commuted to a lump sum) payable from the scheme. Importantly, this benefit is not guaranteed. Every year, the trustee reviews the funding level. If the scheme is under or over funded, the trustee can adjust benefits, usually through amending the target for future pension increases. The process follows:
Members and employers pay in a defined contribution.
Contribution converted to 'target pension'. Conversion terms set annually and vary by age (younger members build up more pension).
Scheme valuation every year. If surplus, future target pension increases go up. If deficit, they go down. One-off cuts and uplifts possible for large surplus or deficit. Experience reflected in full with no buffer.
Funding level is rebased each year to 100% (by adjusting the pension increases) so no surplus or deficit emerges. Conversion terms set the following year.
A wind-up process can be an unsettling time for members if the process isn’t managed well. Receiving their benefits from a different party, changes to terms for certain benefit options and losing the familiarity of regular scheme newsletters could make members feel uneasy.
Communicating clearly about each stage of the process so that members understand what the wind-up means for them is key to allay any concerns and ensure they have confidence in the action being taken. Key steps to help with this are:
Agreeing a clear member communication strategy to keep all members informed and reassured throughout the process from buy-in to wind-up;
Implementing a well-managed project plan to ensure you deliver what you’ve told members you’ll do; and
Managing a smooth payroll and administration transfer to the insurer so that members have confidence in the insurer from day one.
CDC schemes offer a collective investment approach and aim to provide a stable income in retirement. DC (Defined Contribution) pensions are individual savings pots where members choose how to invest and draw down their money.
Unlocking DB pension surpluses could provide UK businesses with significant capital for investment, potentially boosting productivity and growth. It may also encourage companies to maintain their pension schemes rather than transferring them to insurers, preserving long-term investment opportunities. (The Times)
Fairness in CDC schemes depends on good design. LCP advises using age-related conversion rates and timely sharing of scheme experience to ensure fairness across generations.
DC pensions potentially require more frequent and personalised communication to support member decisions. CDC communications focus on building trust and helping members understand their expected benefits.
