Confidence in CDC adoption remains low

According to a recent survey conducted by Sacker & Partners LLP, confidence in the adoption of collective defined contribution (CDC) pension schemes remains low, even as political and regulatory support grows. The findings, gauged during a webinar, revealed that 61% of respondents do not believe CDC arrangements will significantly gain traction. When asked about the most challenging features of CDC to communicate, nearly half of the participants, 48%, expressed concern over all elements of the model, while 26% flagged the potential for reduced retirement incomes as the most difficult aspect to convey to members.

These insights emerge at a crucial time for CDC, as the Government aims to broaden the framework beyond single and connected employer schemes. The objective is to facilitate both unconnected multi-employer schemes (UMES) and retirement-only CDC arrangements. Andrew Worthington, a partner at Sackers, remarked that the primary challenge for CDC isn't the model itself but rather the lack of familiarity surrounding how it operates. He noted, “As a new approach for the UK pensions market, building confidence will take time, like any innovation."

Worthington went on to highlight that uncertainty about retirement income is a common concern. He explained, "In practice, retirement incomes under DC are already uncertain, fluctuating with market performance and individual decisions." He believes CDC could emerge as a significant alternative alongside defined benefit (DB) and defined contribution (DC) schemes. It promises employers certainty regarding contribution costs while offering members the benefits of collective investment, risk pooling, and the likelihood of a more predictable retirement income compared to conventional DC arrangements.

Furthermore, he added, “Similar CDC models have been operating successfully overseas for many years, demonstrating that they can deliver good outcomes for both employers and members.” The opportunity for the UK to leverage this global experience is present, yet Worthington emphasised the necessity for ongoing government support, practical regulations, and increased real-world experience to unlock the full potential of CDC.

Recent government announcements reflect significant progress toward broader adoption, acknowledging industry concerns about implementation. The possibility of easing the new guided retirement proposals has been suggested where schemes are contemplating using retirement CDC as their default option. "This momentum will need to continue as CDC cannot succeed through single employer demand alone; it needs policy leadership to build confidence and encourage wider adoption," Worthington said. He underscored that the new flexibility introduced to assist UMES CDC schemes with the authorisation process should stimulate innovation while ensuring appropriate safeguards are in place. Supporting employers, trustees, and advisers in assessing whether CDC aligns with their circumstances is essential to bolster confidence in this emerging model.