UK Pensions briefing | Government gives the green light to major collective DC expansion

What are CDC schemes?

In a CDC scheme, employers’ and members’ fixed contributions are pooled in a single collective fund, rather than individual DC “pots”, to produce a target retirement benefit. CDC is sometimes described as a “third way” between pure DB and DC pensions, with retirement income provided directly from the scheme, although the retiree’s pension amount is not guaranteed as it is from a DB scheme. The targeted retirement income generated from a CDC scheme is based on the value of assets in the whole scheme, with longevity and investment risks being borne collectively between all members. However, this does mean pensions in payment can go down.

The advantages of CDC schemes are costs certainty for employers (the level of pension payment is not employer-guaranteed as in a DB scheme) and potentially higher investment returns for members as contributions can be invested for longer in a range of more illiquid assets.

Since August 2022, CDC schemes have been available but only for single employers or those employers connected financially through a corporate group. To date, the only CDC scheme launched in the UK is that of Royal Mail in October 2024. Under the new regime coming into force on July 31, 2026, the introduction of whole-life unconnected multi-employer schemes (UMESs) will herald the expansion of CDC availability to many more employers.

Expansion of CDC to unconnected employers

Since 2012, the auto-enrolment regime has resulted in millions of people contributing to retirement savings who had not previously done so. However, although public engagement with pensions has increased, the amount of eventual pension achieved under auto-enrolment alone is recognised as unlikely to provide a comfortable level of retirement income. Enter multi-employer CDC and a new pension model which is aiming to address the shortfall between current DC savings and the level of DB pensions enjoyed by many employees in the past.

The UMES regulations, due to come into force at the end of July 2026, will extend the scope of CDC. Key provisions are outlined below.

• UMESs will be authorised by the Regulator and the regime will be similar to the requirements of the master trust authorisation regime to an extent, although the UMES authorisation regime will be separate from those applying to single and connected employer CDC schemes and also from the regime applying to master trusts. Individuals involved in a UMES will have to satisfy a “fit and proper person test”.
• UMES design will need to be “financially sustainable”. A scheme proprietor (which cannot be the trustee) will stand behind the scheme financially and make commercial decisions. It will be liable to meet some of the set-up costs and any shortfalls. The scheme proprietor will need to satisfy the Regulator that it has access to (rather than directly holding) the requisite financial resources and will need to submit a business plan.

• A viability report from the trustee (approved by the scheme proprietor) will be part of the authorisation process. It will set out how benefits are determined and the scheme’s investment strategy. The actuary will provide a certificate on the level of benefits and increases.
• UMESs will need to have adequate systems and processes in place for communicating with members and employers. Communications cannot be unclear or misleading and target benefits will need to realistic.
• Benefits will be valued and adjusted on an annual basis to keep costs and assets in balance. Strict rules will be in place to prevent cross-subsidisation between members or employers.
• Transfer legislation will be amended to allow bulk transfers without consent into authorised UMESs.
• The Regulator will provide an updated Code of Practice which will be consulted upon separately.

CDC schemes as a decumulation vehicle

The Pension Schemes Bill includes a new duty for trustees of occupational DC schemes to offer their members guided retirement options in the form of default retirement solutions. Where is it not seen as practicable for trustees to offer decumulation options from their own scheme a transfer to a new retirement CDC arrangement could be an alternative. These duties are due to be introduced in 2027 for DC master trusts and in 2028 for other workplace DC schemes.

Retirement CDC schemes will operate as a commercial wholesale market available for consideration by trustees of a DC arrangement but will not be directly available to individual members. The intention is that they will be established as a section of a master trust or a UMES but with pensioner members only.

The consultation also suggests that a universal CDC provider could be established and operated by NEST or the PPF. This would mean that CDC retirement income could also be available to the self-employed.

The consultation closes on December 4, 2025.

Comment

The Government’s press release announcing the proposed CDC developments suggests that such schemes could “boost retirement incomes by up to 60% while providing more security”. However, the Dutch experience of recent years suggests that there can be significant problems relating to member understanding on the risk mechanisms in CDC schemes, as well as potential intergenerational unfairness when market downturns are seen as resulting in younger members cross-subsidising the benefits paid to retired members.

Nevertheless, the Government considers that CDC has an important part to play in the UK’s pensions future, as it clearly advocates “fewer, bigger and better pension schemes” of which collective funds are an essential part. Most DC savers are currently left to manage their own investment and longevity risks and CDC would address this issue.

Whilst perhaps not a silver bullet to replace the DB schemes of old, CDC will enable members to share investment and longevity risks and perhaps receive a higher retirement income than annuities or self-invested options. It will also provide an additional option to DC scheme trustees as they decide how to fulfil their duty on decumulation offerings, as well as potentially safeguarding members against the risk of their retirement income running out too early.