Collective defined contribution pensions with investment choice

This project will investigate how collective defined contribution (CDC) pension schemes operate in the UK.  

CDC pension schemes are a new model in which members and employers share the risks to achieve better pension outcomes. Legislation enabling CDC schemes came into force in the UK in 2022 and further legislation is anticipated to enable a broader range of schemes.

Why is this important?

A pilot grant from the project team looked at international experience of CDC to support the design, legislation, and regulation of UK CDC funds. A key issue uncovered by this research was that UK legislation requires that investors should be able to opt out of any fund, international schemes have been compulsory. International schemes have used an approach where a central planner chooses how to share risks between generations. As this can result in some members being worse off in such schemes, this approach cannot be used in the UK as these members would opt out.  

What does it involve?

The project will address the following research questions: 

1. What is the impact of voluntary membership on CDC scheme sustainability? 

2. What is the scope for individualisation within CDC schemes? 

3. How could flexible employee contribution rates be converted into variable benefit entitlements? 

4. What is the optimal contribution rate, balancing the possibility of increased opt-out rates and achieving targeted benefits? 

5. How could transfer rules and calculation of transfer values be determined? 

6. How could communication to members be approached to manage expectations and build trust? 

7. How do different risk factors influence CDC, and how should investors insure against these risks?  

The research team will explore a theoretical approach to managing CDC funds which is compatible with UK legislation. A model will explore different CDC strategies; test the boundary conditions of scheme size, membership, and cashflow necessary for the risk sharing benefits; and the seed-funding needed to establish a new scheme. The impact of different risk factors and innovations will also be modelled.   

Interviews with stakeholders will investigate the practicalities and challenges of designing and implementing CDC schemes. Research will also look at what schemes need to do to meet The Pension Regulator’s authorisation criteria and investigate the design of the proposed Royal Mail CDC scheme.  

How will it make a difference?

Briefing notes and summary documents, infographics, and a final report will disseminate the findings with the aim of informing future pension policy.