Every year, firms and employees contribute lots of money to workplace pensions. Yet while surveys indicate most workers want their pension to give them a reliable income in retirement, current defined contribution (DC) pensions don’t do that.

Because of this, Parliament passed a Bill in 2021, allowing collective defined contribution (CDC) pensions to be set up. Like DC, the risk in the pension lies with the saver. However, research suggests these pensions will, for the same cost, create a reliable retirement income that’s 30% higher than are otherwise available through DC saving. The Royal Mail will be the first UK employer to introduce a CDC plan.

However, while CDC pensions are attracting lots of interest in the pension world, so far there’s been less discussion in the HR community.

Establishing a new kind of pension arrangement isn’t straightforward. It faces several Catch-22’s. Employers need clarity on future regulation, while policy makers need to know what employers would like to do. Workers and unions want better pensions, but don’t want to give up current arrangements for fear of what will replace them.

For ten years, the Royal Society for Arts (RSA) has championed CDC. With primary regulation passed, but with secondary regulation still to come, it has created a ‘CDC Forum’. Working closely with the Government, Parliament, pension advisors, trade unions and others, its aim is to help as many people as want it to benefit from CDC, within a safe regime of regulation and governance.

Discussions are already underway with government, pension professionals, unions, and pension bodies, but the CDC Forum now wants to expand these discussions to the corporate community, especially people professionals.

How CDC pensions work

The upside from well-regulated CDC is achieved by allowing people to save together and share ‘longevity risk’. Everyone gets an income for life, for some that may mean their pension only lasts a few years, for others the income will last for decades.

Also, employees don’t need to decide what to do when they retire. The scheme pays each of them a pension on retirement, rather than forcing them to decide about buying an annuity or how to draw an income from their pension fund. Also, members aren’t required to make investment decisions before or after they retire because it’s all managed by the trustees of the CDC scheme.

These advantages should help firms with workforce planning, as fewer employees will postpone retirement because they don’t understand their options or are concerned that their pension won’t be large enough.

What still needs to be done?

Currently, the legislation only relates to single employers, but the Government indicates it will use its powers to open CDC to all organisations. Perhaps there could also be a system to allow those who have saved into a DC plan to use CDC-type structures to purchase a pension when they retire. But before doing these, a decision needs to be made about how the new structure will work.

Critical to these decisions is the position of HR professionals. The CDC Forum would like to invite HR directors who want to know more about CDC to contact it as well as asking them to join it in helping frame future regulations. If you’d like to get involved, then drop me an email at: charles.cotton@cipd.co.uk and I’ll pass it on.

About the author

Charles Cotton, Senior Performance and Reward Adviser

Charles has recently led research into the business case for pensions, how front line managers make and communicate reward decisions, and managing reward risks, as well as the creation of a good practice guide on the annual pay review process. He is also responsible for the CIPD’s public policy work in the area of reward and is a Chartered Fellow of the CIPD.

More thought leadership

Thought leadership
Benchmarking employee turnover: Latest trends and insights

Understanding how your organisation compares can enable you to stay ahead, retain valuable employees, and understand the cost of attrition to your organisation

Thought leadership
HR operating models

Our series on current practices, future models and successful transformations

Thought leadership
Do current HR operating models serve future needs?

We look at what’s driving change in HR structures, what emerging models look like and what to consider when evolving your current model

Thought leadership
Agile pay methods: What HR should consider

While offering different pay methods could be a boost for employees, we need to ensure there are no unintended consequences