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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.

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Collective Defined Contribution (CDC) is a type of employee retirement provision which provides members an annual income in retirement at a fixed cost for the employer. This is an alternative option for employers, compared to the traditional options of defined benefit (DB) pensions and 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:

Pension costs are fixed

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


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.1


Form of benefit

A CDC scheme provides benefits in the form of a pension, where:

  • 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 (as they could from a drawdown pot)
  • CDC is simpler for members than DC, as they don’t need to make investment or retirement provision decisions.

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.

WTW have been at the centre of developments of CDC pensions in the UK 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 WTW consultant or one of our CDC specialists listed on the right, or below on a mobile device.

Footnote

Please see our Guide to Collective Defined Contribution pensions for further detail on these figures.

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