CDC schemes need a new approach to investing that focuses on member outcomes rather than traditional portfolio metrics.
This is according to a new report from LCP, whose latest instalment of its CDC investment series argues that investment strategies for collective defined contribution schemes should be built around the pensions members are expected to receive, rather than simply targeting the highest return for a given level of risk.
LCP says CDC schemes differ from both defined benefit and individual defined contribution arrangements because investment returns are shared collectively and feed directly into future pension increases and, where necessary, benefit reductions.
LCP says it believes that success should be measured by factors such as expected pension outcomes, pension stability, inflation protection and the likelihood of benefit cuts, rather than short-term market volatility.
The report also highlights the importance of scheme demographics when determining investment strategy. Younger schemes may be able to take on greater investment risk because they have more time to recover from market downturns, while more mature schemes may prioritise stability and downside protection.
LCP adds there is no single investment model suitable for all CDC schemes. It suggests that strategies should reflect each scheme’s objectives around pension adequacy, stability, inflation resilience and intergenerational fairness.
It also suggests that CDC portfolios are likely to place greater emphasis on long-term growth assets, diversification, protection against inflation and the ability to recover from periods of market stress.
LCP partner and head of CDC Steven Taylor says: “CDC investment strategy is not about avoiding risk; it is about how investment risk is translated into pension outcomes over time. That requires a shift in mindset and a more innovative approach to investment design. The key challenge is building portfolios that can absorb shocks, recover from stress and continue to support sustainable pensions for members over decades.”
LCP partner Laun Middleton says: “CDC needs a broader investment toolkit than traditional pension investing, drawing on the best ideas from both DB and DC. Long-term growth remains essential, but it must be combined with portfolio designs that are resilient through inflation shocks, market stress and changing economic regimes.
“The challenge for CDC investors is not whether to take risk, but how to build portfolios that can continue supporting member outcomes through decades of uncertainty.”