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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.

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:

  1. 01

    Pension costs are fixed

    Employers’ pension budgets will not need to vary year-on-year.

  2. 02

    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 DC, 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.

Other forms of CDC pension schemes already exist in the Netherlands, parts of Canada, and Denmark, and have recently been introduced in Germany and Japan.

You can find out more about CDC by downloading our Guide to Collective Defined Contribution pensions.

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.

If you’d like to discuss CDC pension provision, please contact your Willis Towers Watson consultant or one of our CDC specialists listed on the right.

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