What is a CDC pension?
A CDC pension is a new style of pension scheme designed to bridge the gap between Defined Benefit (DB) and Defined Contribution (DC) schemes. It has the potential to offer members a higher and more predictable retirement income than Defined Contribution schemes and take-out the risk of unexpected pension-related costs for employers compared to DB schemes.
How it works
Unlike a DC scheme, a CDC scheme provides a whole-life pension income to members.
The contributions employers and members pay are fixed and pooled into a collective fund. By pooling investment and life expectancy risk amongst the membership, a CDC pension is expected to generate higher returns than an individual DC scheme resulting in higher expected benefits.
Annual increases to benefits depend on the performance of the scheme. This removes the possibility of the employer having to plug a funding gap.
Transcript
Hi, I am Andy O'Regan, the Chief Client Strategy Officer at TPT.
Today I want to talk to you about a game changer for the pensions industry that's Collective Defined Contribution or CDC pension schemes.
You may be aware that Royal Mail launched the first CDC scheme in October, 2024.
This new type of pension arrangement is designed to combine the best features of traditional defined benefit and defined contribution plans, offering tangible benefits to both employers and pension scheme members.
The government has consulted on regulations which will make CDC available to any employer of any size in a cost effective way.
TPT is now actively exploring the development of a CDC scheme.
We Are opening up our diaries from January, 2025 to have initial conversations with interested employers.
These meetings are designed to capture valuable feedback from you and help us to shape our offering by taking 30 minutes to have a conversation with us.
You'll get early insight into the CDC framework and its advantages.
CDC schemes combine the best features of traditional pension arrangements, an income in retirement for the pension scheme members, similar to defined benefit and the predictability in contributions for the employers similar to defined contribution schemes by pooling risks.
It is expected that CDC schemes can deliver better outcomes for pension scheme members than DC without increasing the cost for employers.
Please book a 30 minute meeting with us to discuss how CDC can benefit your organisation and your workforce.
We look forward to the opportunity to discuss CDC with you and how we can make pension schemes perform better for everyone.
Many thanks for your time and look forward to speaking to you soon.
The benefits of CDC
CDC - the best of both worlds
Download our flyer below to see how CDC pension schemes are bridging the gap between Defined Benefit (DB) and Defined Contribution (DC) pensions.
Chat with us
Ask a question, book a call with us or learn more about CDC.
CDC schemes offer members a seamless transition to a regular retirement income, which many want, without the need for complex financial decisions. CDC schemes can also shield savers from much of the uncertainty faced by members of DC schemes.
CDC and TPT
Although CDC has been operating in other countries for a few years, it was only introduced to the UK as part of the Pension Schemes Act in 2021.
The Department for Workplace Pensions started looking to extend CDC to Unconnected Multiple Employer Schemes in 2023 and have recently released draft regulations for consultation. The draft regulations build on the existing single employer CDC regulations, adapting these to allow greater flexibility in scheme design. The issuing of the draft regulations is a positive step towards Unconnected Multiple Employer Schemes entering the pensions landscape. The consultation period concluded on 19 November 2024.
We’d like to hear from both new and existing employers as we look to develop our CDC offering.
See what our Chief Client Strategy Officer Andy O’Regan thinks about CDC using the link below.
CDC Podcast
The following Mallowstreet talks podcast features Andy O’Regan, TPT’s Chief Client Strategy Officer, and covers the growth of CDC pension schemes.
FAQs
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Can you open a CDC pension scheme if you have already have an existing DB or DC scheme in place?
Yes, Collective Defined Contribution schemes will be an option for all employers regardless of whether they currently offer DB or DC (or a combination of DB and DC) to their employees.
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What is the risk of a funding deficit in Collective Defined Contribution scheme?
There is no funding risk for the employer. The funding position of a CDC scheme will be assessed annually by the Scheme Actuary. If the assessment identifies that the assets in the scheme are lower than the value expected then the targeted level of income will be adjusted accordingly. No deficit contributions would be payable by the employer.
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Will you be able to take income drawdown from a CDC pension at retirement?
No, Collective Defined Contribution schemes are designed to provide members with a targeted income for life. Therefore, income drawdown will not be available from the scheme.
However, If a member wishes to take drawdown they will be able to transfer the assessed value of their CDC benefits into a DC scheme for drawdown.
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Will salary sacrifice be available within a CDC pension scheme?
Yes, we anticipate that employers will be able to offer salary sacrifice to members of Collective Defined Contribution schemes.
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How will pension benefits be paid from a Collective Defined Contribution pension scheme, will members need to purchase an annuity at retirement?
No, members' pensions will be paid directly from the Collective Defined Contribution pension scheme (similar to a DB arrangement).
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Can you take a tax free cash lump sum from a Collective Defined Contribution pension scheme?
Yes, we expect the regulations to allow members to take a tax free lump sum on retirement from their CDC pension. Part of the accrued pension would be converted to the lump sum (similar to a DB arrangement).
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Could members transfer existing/deferred funds into a CDC pension scheme?
Yes, we expect the regulations to allow transfers into the CDC scheme from either DB or DC. The value of the transfer value would buy a certain target level of pension in the CDC scheme.
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Will you be able to make additional voluntary contributions (AVCs) to a CDC pension?
Yes, we expect the regulations to allow AVCs in CDC pension schemes.
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In the event of death what benefits will be paid from a CDC pension scheme?
Yes, we expect there will be scope for CDC schemes to have some beneficiary benefits 'built-in' to the scheme design.
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How is the pension at retirement and increases calculated in a Collective Defined Contribution pension scheme?
The target pension 'earned' each year from a CSC pension scheme will be calculated by considering the value of contributions paid in, the age of the member, target future pension increase rate and projected future life expectancy. This target pension earned each year is then increased both before and after retirement.
or
Much like a DB scheme CDC pension schemes will target a certain indexed income in retirement. However, where a DB scheme guarantees the increases a CDC will apply the target increase where the funding allows it based on the schemes annual valuation. -
How will contribution levels be set in a Collective Defined Contribution pension scheme?
Contribution levels will be set by the sponsoring employer. Employers currently offering DC benefits may choose to use the same contribution rates within Collective Defined Contribution pension scheme. Employers will also need to be mindful of the Auto Enrolment requirements.
Get in touch
Leave your details and we’ll be in touch, or drop us a line to tell us about your requirements and we’ll see how we can help.
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Andy O'Regan
Chief Client Strategy Officer
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Paul Eagles
Head of Professional Services
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