Collective money purchase schemes (also known as collective DC schemes)

The Pension Schemes Act 2021 provides a statutory framework for collective money purchase (more commonly known as, collective defined contribution (“CDC”)) schemes in the UK. Regulations set out the authorisation and supervision regime.

What is CDC?

CDC is a type of DC arrangement where member and employer contributions are invested in a single collective fund, rather than individual pots, with members receiving a pension from the scheme at retirement based on the value of assets in the scheme. As they offer a target (as opposed to a guaranteed) level of pension benefits, the government considers CDC to be a “third way” between traditional DB schemes and individual DC schemes.

Advantages of CDC

For employers:

  • more predictable costs than DB schemes as there is no obligation on employers to make additional contributions should the level of assets fall short of the benefits that need to be paid – members bear the risk.
  • the opportunity to provide a compromise solution between the unknowns of a DB scheme and the benefits of collective investment and benefit provision that aren’t available in an individual DC scheme.

For members:

  • no need for members to make complex decisions about investments or the options for converting funds into an income stream in retirement as, unless a member chooses otherwise, a CDC scheme will provide a pension from the scheme.
  • members should enjoy an element of cushioning from volatility, as investment risk is adjusted for over time and longevity risk is pooled across the membership.
  • scope for CDC schemes to invest in a wider range of assets, including illiquids such as infrastructure, which could offer better returns.

Disadvantages of CDC

CDC pension benefits can fluctuate; they are not guaranteed.  This applies to both projected pension benefits and those already in payment.

The rate or amount of benefits payable is subject to periodic adjustments to balance the value of the assets of the scheme and the amount expected to be required to provide benefits to the members of the scheme collectively. Therefore if circumstances change eg investment performance changes, benefit levels could change. This is a complex message to get members to understand and requires regular actuarial valuations and potential adjustments.