CDC - a new type of pension provision coming to the UK

Collective Defined Contribution (CDC) is a new type of employee retirement provision under which employers pay a fixed rate of contributions into the scheme and members are paid pensions with variable increases. The law is due to change to allow UK employers to open a CDC scheme for their employees, potentially from as early as 2021. This will be a third option for employers, the two existing options being defined benefit (DB) pensions or individual defined contribution (IDC) pensions.

CDC is likely to be most compelling for those employers where the following key advantages of CDC pensions are important:

• Pension costs are fixed, so employers’ pension budgets will not need to vary year-on-year.
• Expected pension levels are higher - for a given contribution rate, the expected CDC pension is on average 70% higher than from buying an insured annuity with an IDC pot, and 40% higher than provided under a typical DB scheme.

Also, a CDC scheme provides benefits in the form of a pension, so:

• Market volatility is smoothed out so that member pension levels (both pre and post retirement) are relatively stable.
• Members don’t run the risk of running out of money (from a drawdown pot).
• CDC is simpler for members than IDC, as they don’t need to make investment or retirement provision decisions.

Initially, employers wanting to provide CDC will need to do so through their own trust arrangement - employers with large workforces of over 5,000 employees would be best placed to open a cost-effective CDC scheme. In time, further law changes could enable CDC multi-employer schemes or master trusts, making CDC more accessible for employers with less large workforces.

Please download our guide to CDC below on 15 commonly asked questions, including how CDC schemes will work and more information on whether CDC could be the best option for your workforce.

Willis Towers Watson have been at the centre of developments in UK CDC pensions and would be very happy to help you consider whether to introduce it for your organisation. Please contact one of our CDC specialists listed below.