Retirement in the UK is starting to feel out of reach for many workers. Not because people do not understand the importance of pensions, nor because they are unwilling to save, but because once the bills are paid, there is little left.
The Pensions Commission’s figures tell the story. Around 15 million people are estimated to be under saving for retirement, while projections suggest millions could face pensioner poverty by 2040 if current trends continue. Only around 4 per cent of self-employed people are contributing to a pension, and participation among lower earners remains low. At the same time, younger generations are entering working life carrying student debt, trying to get on a difficult housing market and dealing with rising everyday costs.
The UK retirement system now relies almost entirely on defined contribution saving. This has been hugely successful in widening access to pensions, but it has shifted responsibility onto individuals. The traditional response has been to encourage people to save more. The problem is many households have already reached the limits of what they can afford. Retirement is not a question of how many holidays each year or whether a new hobby can be afforded. The more pressing question is whether homes can be heated, rent paid, and food and everyday living costs met. That may sound stark, but it reflects the reality facing many households today.
If we cannot realistically expect people to save more, perhaps the better question is whether the money they are already saving can work harder. That is where collective defined contribution (CDC) comes in.
CDC takes a different approach. Instead of individuals carrying investment and longevity risk alone, contributions are pooled across members. Members save collectively benefiting from scale and shared risk which allows the underlying investments to remain in higher-risk assets for longer. It does not promise guaranteed benefits, but nor does it leave individuals solely responsible for complex retirement decision-making. Instead, CDC focuses on delivering a sustainable retirement income.
DC pensions have done a lot to expand access to saving, but they have also created a system that can be difficult for people to navigate. Throughout their working lives, individuals are expected to make decisions about contributions, investments, consolidating pots and, ultimately, how to turn savings into income. At retirement, those decisions become even more complex, often involving drawdown, annuities and longevity risk.
Many savers lack financial confidence and do not engage. The result is a system that often places complexity where it is least wanted and least understood, leading to very different outcomes for people with similar savings histories.
Surveys show that pension savers are not looking to become investment experts, they just want a secure retirement income, reassurance their money won’t run out and fewer complex decisions. CDC aligns more closely with those desires.Rather than focusing on the size of an individual pot, it focuses on the outcome people actually care about: income.
What about employers?
Employers face a challenge of their own. They want to support employees, attract and retain talent, and improve financial wellbeing. At the same time, few have any desire to revisit the funding uncertainty that characterised DB provision.
CDC does not change the fundamental cost of pension provision for employers. Contributions remain defined and predictable, and there is no introduction of balance sheet risk. By pooling contributions and sharing risk, CDC has the potential to improve retirement income outcomes by over 30 per cent according to some advisory firms, without increasing employer cost.
For employers, the appeal is straightforward: cost certainty combined with better outcomes for employees. Any viable future pension model still needs to be predictable in cost, manageable in governance, scalable across the workforce and sustainable over the long term. CDC is designed for that.
The UK is still in the early stages of its CDC journey. Royal Mail is the only live example, and wider adoption will require continued government support, regulatory clarity and growing employer confidence. Yet with millions under-saving and pensioner poverty still a real risk, can we afford not to explore alternatives? CDC is not a silver bullet, but it may be one of the most promising ideas currently on the table.