How is CDC different from DC pensions?

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.

How might unlocking DB pension surpluses impact UK businesses?

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)

Is CDC fair for all members?

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.

Is communication easier in CDC or DC pensions?

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.

Is pension risk transfer still a competitive market?

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.

What alternative endgame options are emerging for pension schemes?

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.

What are Additional Voluntary Contributions (AVCs)?

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

What are commodities?

The asset class comprising a range of physical goods. Examples include foodstuffs such as wheat, metals such as copper as well as energy sources such as oil. Commodity prices can be volatile, often as a result of geopolitical and weather events. Commodity prices can rise in response to inflation and can also cause inflation to rise. They can be used potentially to mitigate a pension scheme’s inflation risk.

What are contributions?

The amounts paid into a pension scheme by the sponsor and, often, the members as well. Contributions may take the form of regular payments which are part of the sponsor’s normal payroll expenses or may be “special contributions” which a sponsor makes, typically to eliminate a defined benefit (DB) funding deficit (ie the amount by which a scheme’s assets fall short of the target value of assets to meet the scheme’s accrued liabilities).

What are financially material considerations?

These are factors which could have a significant impact on the value of an investment and should be considered by investors when making decisions. Legislation means that UK pension scheme trustees must take such factors into account. The term is often used when referring to environmental, social and governance (ESG) considerations although it is not limited to these issues.

Pensions and benefits

Your questions answered

Q: What are Collective Defined Contribution (CDC) pension schemes?

CDC schemes combine: for members, a target pension at retirement and an income for life after retirement, like a defined benefit (DB) scheme; with for employers, the cost certainty of a defined contribution (DC) scheme. Like a DC scheme, benefits are funded by a regular, fixed contribution from employers and employees but, unlike a DC scheme, the investments are managed collectively. Members share risk, enabling CDC schemes to invest in growth assets for much longer than either a typical DB or DC scheme.

Explore answers to commonly asked questions about pensions.

Curious? Your questions answered

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.

: 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.

: 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.

CDC schemes combine:

for members, a target pension at retirement and an income for life after retirement, like a defined benefit (DB) scheme; with
for employers, the cost certainty of a defined contribution (DC) scheme.

Like a DC scheme, benefits are funded by a regular, fixed contribution from employers and employees but, unlike a DC scheme, the investments are managed collectively. Members share risk, enabling CDC schemes to invest in growth assets for much longer than either a typical DB or DC scheme.

: The asset class comprising a range of physical goods. Examples include foodstuffs such as wheat, metals such as copper as well as energy sources such as oil. Commodity prices can be volatile, often as a result of geopolitical and weather events. Commodity prices can rise in response to inflation and can also cause inflation to rise. They can be used potentially to mitigate a pension scheme’s inflation risk.

: The amounts paid into a pension scheme by the sponsor and, often, the members as well. Contributions may take the form of regular payments which are part of the sponsor’s normal payroll expenses or may be “special contributions” which a sponsor makes, typically to eliminate a defined benefit (DB) funding deficit (ie the amount by which a scheme’s assets fall short of the target value of assets to meet the scheme’s accrued liabilities).

: These are factors which could have a significant impact on the value of an investment and should be considered by investors when making decisions. Legislation means that UK pension scheme trustees must take such factors into account. The term is often used when referring to environmental, social and governance (ESG) considerations although it is not limited to these issues.