Trustees face governance challenges with CDC schemes

ZEDRA, an award-winning provider of pension and incentive services, has issued a strong warning to trustees regarding the upcoming governance challenges posed by Collective Defined Contribution (CDC) schemes. The firm emphasises that the implications of CDC will necessitate a significant shift in how trustees approach decision-making, highlighting that governance and the processes behind it should receive as much attention as the scheme design itself.

With CDC pensions increasingly viewed as a viable alternative between traditional defined benefit (DB) and defined contribution (DC) models, ZEDRA encourages trustees to start preparing for the new types of decisions they will likely need to make. These decisions may directly impact members' benefits, adding urgency to the need for a robust governance framework.

Sam Burden, Client Director at ZEDRA, noted, “Much of the conversation around CDC has focused on its potential to bridge the gap between defined benefit and defined contribution pensions, and rightly so. However, an equally important consideration is how CDC changes the role of trustees and the decisions they will be required to make." Burden elaborates that, “Unlike many traditional pension decisions, CDC trustees will be required to make ongoing judgements that balance competing priorities, including different forms of risk, fairness between generations and the long-term sustainability of the scheme."

He further stressed the complexity of these decisions, pointing out that “These are complex decisions where there will not always be a single 'right' answer." Given the gravity of these choices, he argues that governance becomes an essential focus. It is crucial for trustees to have confidence both in their decision-making and the processes that underpin their choices. Burden insists, “Where decisions have the potential to affect members’ benefits, those processes should be established, tested and understood well in advance. You don’t want to be designing the process at the same time as making difficult decisions.”

Looking ahead, Burden commented, “CDC has significant potential, but its success will depend on more than scheme design alone. As the UK CDC market develops, trustee boards should consider whether they have the right governance, experience and perspective to meet the demands of this evolving landscape." He urges that taking proactive steps now can position schemes to make informed and balanced decisions at critical moments when member interests are at stake.