Your questions answered

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:

1. Members and employers pay in a defined contribution.
2. Contribution converted to 'target pension'. Conversion terms set annually and vary by age (younger members build up more pension).
3. 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.
4. 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.

For schemes that are required to carry out an ORA, stewardship should be built into the assessment of the scheme’s overall governance and risk management. The focus should not simply be on whether stewardship is being done, but on how effective the scheme’s approach is in practice. That includes considering whether stewardship arrangements are helping trustees identify, monitor and manage investment risks, including those arising from ESG factors, regulatory developments and wider societal change.

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.

55% of DB pension schemes are now fully buy-out funded, up from 43% in 2025. This improvement reflects highly competitive insurance pricing as well as strong and resilient funding levels. However, many schemes are weighing up their options, including whether to run-on for a period after full insurance first becomes affordable, as well as explore whether longer-term run-on could lead to improved outcomes.

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.

Pension risk transfer remains a competitive market, supported by strong insurer appetite, continued investor interest and significant capital backing the sector. For schemes approaching the market, that can mean sustained capacity, a good level of choice and continued momentum in bulk annuity transactions.

Longevity feeds directly into funding levels, surplus and endgame decisions, and small changes in assumptions can move outcomes materially. With industry assumptions appearing to stabilise and possibly turn upward, schemes planning to run on, insure, or use insurance strategically have good reason to check that the assumptions underpinning their plans are still relevant.

The Pension Schemes Bill is introducing new surplus sharing flexibilities to facilitate run-on strategies and a legal framework for DB superfunds, providing an alternative to insurance for schemes that are not fully funded.

Extra contributions paid by pension scheme members to secure benefits in excess of the standard scheme benefits.