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Collective Defined Contribution

Collective defined contribution (CDC) pension schemes allow savers to pool their money into a single fund which pays annual pension income. Pension increases vary depending on the funding level, so costs are fixed for employers, while higher member pensions are expected than under traditional defined contribution (DC) annuities.

The Pension Schemes Bill 2019/20 contains provisions to allow CDC schemes to open in the UK. The Government intends to start by allowing single or associated employers to establish their own CDC trusts, which is expected to become an option from 2021. It is also enthusiastic about opening up CDC to other employers in time; for example those who want different designs, or for master trusts to provide CDC pensions.

The key features of CDC schemes that would make them attractive to some employers are:

  1. 01

    Fixed contributions – unlike defined benefit pensions, contributions stay at the level set by the employer; this removes funding risk, and as a result the scheme stays off an IAS 19 or UK GAAP balance sheet.

  2. 02

    Higher pensions – expected average pensions are higher than from buying an insured annuity through an individual DC account, primarily through the ability to hold growth assets over a longer term due to the sharing of risk.

  3. 03

    Smoothed pension levels – asset price volatility is smoothed through gradual changes to pensions from adjusting the rate of pension increases.

  4. 04

    Longevity pooling – unlike drawdown policies, longevity risks in retirement are pooled, so that pensioners do not run the risk of running out of money.

Other forms of CDC pension schemes already exist in the Netherlands, parts of Canada, and Denmark.

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.

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