Collective defined contribution pension schemes (CDCs) offer opportunities for better retirements than traditional DC schemes. That prize is eye-catching: the DWP’s own recent press release claimed “retirement incomes could increase by as much as 60 per cent”. Others have estimated improvements of between 10 to 60 per cent. But these outcomes are not guaranteed. For CDC to succeed employers need to take members on a clear, engaging journey that sets out both benefits and risks.
In a CDC contributions are pooled and provide an income for life in retirement. Each scheme targets a level of expected benefits that will vary depending on the design. In multi-employer CDCs accrual rates might reflect the member’s age or workforce characteristics, with the aim of actuarial fairness between members. Pooling investments returns, investment risk and longevity risk across the collective should deliver a more stable – and potentially higher – lifetime income than individuals might achieve on their own. However, unlike a DB scheme, there is no employer backstop: all members across generations share gains and losses together. In a prolonged market downturn, incomes could be trimmed.
If members don’t understand what they’re getting into with CDC, they may feel misled if incomes fall short of expected benefits. That’s why clear communications and engagement will be important, as can be seen from what happened in the Netherlands.
Dutch CDCs could use capital buffers to smooth benefits during market downturns. Following the global financial crisis in 2008, the buffers were depleted and pensions were cut for the first time. That technical point is important, but the communication failure was arguably bigger: many members had not appreciated their pension amounts were not guaranteed: that indexation could be lower, or that pensions could even fall. The communications were not sufficiently clear, and when cuts came members lost trust.
UK CDCs avoid that intergenerational cross-subsidy by banning capital buffers.Instead, schemes apply annual benefit adjustments (up or down), reflecting overall performance. The legislation requires that benefit adjustments must apply “without variation” to all members. To generate the higher expected income for life, CDCs tend to invest in more return-seeking assets for longer. This also brings more volatility, and because adjustments must be applied to all members each year, this could result in a higher chance of decreases in benefits. That is a feature, not a flaw – but only if members understand it from day one.
The Dutch example shows how important member communications will be to CDC success. To build trust from the outset member communications should be treated as a core part of the benefit design, not an afterthought. In practical terms this means starting the communications prior to day one. Expectations need to be set before joining, then continue through accumulation and into retirement. This includes clear explanations of how expected benefits are set, how they are adjusted and what floors or caps (if any) apply.
Perceived fairness matters too. CDC benefit design has understandably focused on actuarial fairness, but members will also need to believe benefit adjustments are fair. People typically focus on whether their own individual outcomes have improved, not on a wider collective benefit, so this should be addressed in communications strategies.
Schemes need to be explicit about volatility and risk, and spell out the link between investment performance and annual adjustments in plain language. To do this schemes need to show scenarios, illustrating how different market performance affects benefit adjustments and incomes, rather than relying on abstract details.
In addition, communications should be tailored to the specific demographics of the scheme’s workforce. AI-assisted personalisation may help deliver the right message, at the right moment, in the right medium.
I’m optimistic about CDC’s potential to deliver better outcomes than traditional DC. But scheme design must go hand-in-hand with transparency. Particularly in the early years, when CDCs are still unfamiliar, member understanding is absolutely paramount. If the road from joining to retirement turns out to be bumpier than the headlines suggest, well‑prepared, engaged members will not feel misled: they are more likely to recognise the journey for what it is, and stay on board.
