LCP believes the next generation of Collective Defined Contribution (CDC) schemes can deliver fairness while providing broader benefits to savers.
These schemes are likely to appeal to those seeking a reliable lifetime income without needing to make complex investment or withdrawal decisions.
But as the first UK schemes develop, questions have arisen about fairness, including potential intergenerational imbalances and whether longer-lived members who are often wealthier could gain disproportionately.
In a new blog, LCP explains how the CDC scheme design and regulation are evolving to promote fairness and risk-sharing.
Multi-employer schemes must meet an “actuarial equivalence” test, which ensures pension value matches contributions and protects both younger and older members.
Meanwhile, to prevent wealth transfers between members with differing life expectancies, accrual rates can be adjusted to reflect differences in life expectancy, while longevity pooling remains central to CDC’s collective risk-sharing.
According to LCP, schemes must use best estimate assumptions, meaning pension increases will reflect likely returns. This can particularly benefit younger members who have a longer horizon of future payments.
Additionally, CDC structures adapt to evolving member priorities which allow younger savers to target long-term growth while giving those nearing retirement clearer visibility over their expected income.
LCP partner Helen Draper says: “CDC is new and evolving, and we are seeing innovative approaches being considered, including whether to compensate younger members for greater variability in potential outcomes. By sharing risks between members, CDC aims to deliver more equitable outcomes over time.”
LCP partner Sean Garratt says: “Risk transfer is inherent in CDC, but it is designed to support desirable outcomes: higher pensions, an income for life and no complex decision-making for members. Careful benefit design is key to avoiding unnecessary risk transfer between generations or demographic groups. We are optimistic that the coming wave of CDC schemes will achieve this and earn the trust of future members and their employers.”
