Evolution, Revolution: Government Moves Forward With CDC

The Government has pushed ahead with proposals to enable wider collective defined contribution (CDC) provision. This week has seen two major developments:

• regulations to allow unconnected multi-employer CDC schemes; and
• consultation on plans to allow "retirement CDC".

CDC – a reminder

CDC is a halfway house between DB and DC. Contributions are fixed, as with DC, but assets are invested collectively and mortality risk is pooled. CDC schemes seek to deliver a DB-like pension (eg 1/80ths of average earnings), but the benefits actually paid are adjusted if necessary to keep funding in balance.

CDC schemes are not subject to the DB funding regime or the employer debt legislation. Nor do they qualify for PPF protection.

The current regime: own-trust only

The statutory regime for CDC schemes was established by the Pension Schemes Act 2021. Under the current regime:

• A CDC scheme must be for a single employer or a group of connected employers.
• CDC schemes are subject to authorisation and supervision by The Pensions Regulator (TPR).
• There are special rules about the design and operation of CDC schemes. In particular, there are rules to avoid cross-subsidy as between members.

From next year: unconnected, multi-employer schemes

In October 2024, the Government consulted on proposals to allow CDC schemes for unconnected employers, and published draft regulations to that end. The Government has now issued a consultation response, and has laid a final version of the regulations before Parliament.

Via the regulations:

• A new type of CDC scheme will be permitted: a scheme for two or more unconnected employers (a UME scheme).
• The statutory regime will be modified for UME schemes. The modifications reflect the fact that UME schemes may be set up by commercial providers, and will need to cater for diverse employers and workforces. The latter point means that additional rules are needed to avoid cross-subsidy.
• Like own-trust schemes, UME schemes will be subject to authorisation and supervision by TPR, but under a separate framework.

Some amendments have been made in finalising the draft regulations. For example:

• Changes to make it easier for a scheme to have both a master trust section and a CDC section.
• A more pragmatic approach to the "actuarial equivalence" test which is designed to avoid cross-subsidy.
• Schemes will not, for the time being, be allowed to "tranche by employers" (such that benefit adjustments for members associated with one employer might differ from benefit adjustments for members associated with another). However, the Government will continue to explore the idea of tranching.

The Government plans to bring the UME regulations into force on 31 July 2026, with a new version of TPR's CDC Code of Practice taking effect at the same time.

Would-be UME schemes will then be able to apply to TPR for authorisation. At least one major multi-employer scheme has already announced plans to introduce a CDC section.

Looking forward: retirement CDC

As things stand, any CDC scheme must be a "whole-life" arrangement, covering both accumulation and decumulation. However, the Government has launched a consultation on proposals to allow retirement CDC schemes – arrangements which cover decumulation only.

A retirement CDC scheme would accept transfers made on behalf of retiring DC members, invest the funds received on a collective basis, and pay each member a lifelong income (not guaranteed) with target increases.

The trustees of DC schemes might choose retirement CDC as a "default pension benefit solution" for the purpose of the guided retirement measures in the Pension Schemes Bill.

The Government believes that, by investing collectively and pooling longevity risk, retirement CDC can improve outcomes for retiring DC members. However, some drawbacks are acknowledged: the possibility of benefit reductions and potential inflexibility. An options assessment explains the issues further.

Under the Government's proposals:

• Retirement CDC schemes will be permitted only as dedicated sections within authorised UME CDC schemes or DC master trusts. Retirement CDC schemes (ie sections) will themselves be subject to authorisation.
• Retirement CDC schemes will need to target pension increases at least in line with CPI. There will be flexibility as to other elements of benefit design, for example underwriting to reflect health or demographic factors, death benefits and lump sum payments.
• Retirement CDC schemes, like whole-life schemes, will be exempt from the "minimum size" requirements in the Pension Schemes Bill. However, the Government recognises that retirement schemes will need to achieve scale in order to operate effectively. Views about critical mass are sought under the consultation.
• The retirement CDC market will operate on a wholesale basis, with "buying decisions" made by DC scheme trustees. Individual DC members will be able to access a retirement CDC scheme only if their DC scheme has chosen the CDC scheme for guided retirement purposes, or has otherwise formally partnered with the CDC scheme. Regulations made under the guided retirement measures will facilitate member transfers. The Government will work with the Financial Conduct Authority to build a similar framework for workplace personal pension schemes, and perhaps also for self-invested personal pensions.
• As with whole-life schemes, there will be strict rules as to parity of benefit adjustments. But retirement CDC schemes will be permitted to "cohort" members based on joining dates, with different adjustments applying to different cohorts. The idea would be to ensure that a member neither benefits nor suffers because of a scheme's performance prior to the date on which he or she joined.
• There is likely to be a charge cap for retirement CDC schemes, as there is for whole-life schemes.

The Government will consult on detailed proposals for retirement CDC in mid-2026. It plans to lay regulations in 2027, with the new regime taking effect from the start of 2028.

Transfers without consent

Separately, the Government intends to amend the "preservation regulations" to facilitate transfers to CDC schemes. For statutory purposes, trustees will be able to transfer DC benefits to an authorised CDC scheme without having to obtain members' consent – as is already the case where the receiving scheme is an authorised master trust.

What's next?

The consultation closes on 4 December 2025. A roadmap outlines planned steps beyond that.

Comment

These are radical proposals. If master trusts decide to offer retirement CDC (and, given potential inflows via guided retirement, they will surely be tempted), decumulation patterns could change substantially from 2028 onwards.

For the trustees of DC schemes, there will be plenty to think about: a whole new option for guided retirement, and the possibility of formal partnership with CDC providers. With the Government saying that the market will be wholesale only, the onus will be on DC trustees to determine whether retirement CDC could be right for their members, and if so which retirement scheme(s) should be made available.

The implications go beyond decumulation. DC trustees steering members towards retirement CDC will need to think carefully about their default investment strategy. As the Government flags in the consultation document, traditional lifestyling may not be appropriate if the endgame is a transfer to CDC.

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