The expected pensions from a whole-of-a-life Collective Defined Contribution (CDC) scheme are around 50 per cent higher for the same contribution than from a traditional DC scheme, according to LCP.
LCP analysed 2,500 simulations for a 43-year-old starting a 25-year career with a 12 per cent annual contribution. It shows that CDC schemes offer a median retirement pension of 41 per cent of final salary for a 43-year-old, compared to 27 per cent for DC schemes.
The data suggests that the CDC consistently outperforms DC due to its ability to invest collectively.
LCP is pushing for trustees and sponsors to adopt CDC schemes, which not only provide better pensions but may also contribute to economic growth through long-term investments.
The UK’s first CDC pension scheme is expected to launch in October, providing an alternative to DB and DC schemes and includes risk-sharing and greater investment flexibility, leading to higher returns.
CDC schemes have cross-party support, and new laws for multi-employer schemes are expected early next parliament. There is also the possibility of a ‘decumulation only’ CDC model, which would allow DC savers to purchase a CDC pension at retirement.
LCP partner Helen Draper says: “With DWP figures highlighting that 2 out of every 5 of working-age people in the UK are currently undersaving for their pension, the new CDC approach could be game-changing for many people.
“The CDC model has lots of positives for individuals. It targets far higher benefits than DC alternatives, avoids the need for members to make difficult investment decisions and has the potential to significantly increase intergenerational fairness. For employers, there is more certainty on the costs to the scheme, support from employee representative groups and more freedom when it comes to choosing contribution rates.
“We have been talking about these schemes for a while, but recent developments mean now is the time for sponsors and trustees to get to grips with this new approach and embrace the many opportunities and benefits they can provide.”
LCP partner and head of CDC Steven Taylor says: “We believe CDC schemes have the potential to significantly improve retirement outcomes for the next generation of savers. CDC can achieve this without recreating the employer cost concerns that have hampered DB schemes, and so we believe it will be attractive to employers and employees alike.
“In the early years, CDC schemes will be massively cashflow positive and will have heavily growth-focused investment strategies. This makes them an attractive focus for the new government to help pensions investments into growth assets.”
