Multi-employer whole-of-life CDC predicted to lead next phase of UK pension innovation
The Royal Mail Collective Pension Plan — the UK's first CDC scheme — launched in October 2024 (Graeme Robertson/Getty Images)
With new regulation enabling multi-employer collective defined contribution pension schemes expected to be finalised this month, CDC is attracting growing interest from pension providers and employers. Industry experts speaking at the recent Pensions UK 2025 Annual Conference predicted that multi-employer whole-of-life CDC, offering the longest investment horizon and scope for allocations of up to 25 per cent to private markets, is likely to prove the most attractive model.
The UK's first CDC scheme, the Royal Mail Collective Pension Plan, launched a year ago in October 2024. Now, further regulation enabling the development of multi-employer schemes is expected by the end of November this year, potentially leading to an uptick in activity in the budding UK CDC market.
"Interest is really rising," said Sophie Dapin, OCIO director at BlackRock. "Compared to a year or two ago, more and more pension schemes are talking about it."
In January, MandateWire Analysis reported that 41 per cent of DC pension decision-makers canvassed by Hymans Robertson were "very likely" to introduce a CDC scheme in future.
Offering a target pension for life without requiring individual lifestyle choices to be made, CDC is a defined benefit-like proposition for members. By pooling assets in a DB-like way, it also enables larger-scale, longer-duration investments. "You can keep higher-risk and higher-reward assets," Dapin said.
On the other hand, she said, "for an employer, CDC is more DC-like". Since the payout is a target rather than a guarantee, the surplus-deficit dynamic is absent, and scheme liabilities do not impact the employer's balance sheet.
The potential benefits of such a model are material, according to IGG professional trustee Tegs Harding: "CDC could improve expected outcomes, broadly, by 40 per cent," she said.
“CDC could improve expected outcomes, broadly, by 40 per cent”
What does CDC look like?
The Royal Mail plan is a single-employer CDC scheme. However, pension providers are anticipating the opportunity to create multi-employer options, as promised by pensions minister Torsten Bell in April.
The £10.7bn TPT Retirement Solutions is one provider planning to set up its own multi-employer scheme, which it hopes will be authorised by the end of 2026. Speaking in May, chief executive David Lane said: "We believe there is a clear opportunity for CDC schemes to fill a gap in the pensions market."
"It is perhaps likely that more companies will be more interested in multi-employer schemes [than single-employer schemes]," Dapin said. "They may find it easier joining something that already exists." Another benefit of collaborating at the implementation stage is the chance to spread the costs of set-up.
"I think Royal Mail will be the only single-employer [scheme]," Isio director Iain McLellan said. He said he expects that other "industries and areas... could look at this collectively".
CDC scheme providers must also decide between whole-of-life and decumulation-only options. An existing DC scheme would have the option to transition members to decumulation-only in retirement, whereas whole-of-life bakes in the collective model from the start.
While "decumulation-only could be a compelling option for retirement income in the DC space", Dapin said, "whole-of-life captures the benefits of long-term investing for longer, which are not captured with decumulation-only".
In the Netherlands, where DB pension schemes must choose to move to a CDC or DC model by January 2028, "the majority of schemes are choosing whole-of-life, multi-employer CDC", according to Dapin.
In terms of investment strategy, a CDC scheme "feels more like a [Local Government Pension Scheme] fund" due to its long investment horizon, Harding said. Because of this, allocations to liability-driven investment "wouldn't make sense".
Instead, Dapin said, "an allocation of 15 to 25 per cent to private markets and the rest in public markets is the industry view on what's appropriate".
CDC not a cure-all
CDC is no panacea, however. For one thing, the transition to an entirely new pension scheme model comes with huge operational requirements and complexity.
"It is not possible to take an existing system set-up and add a few bolt-ons... it requires a fundamental rethink about the nature of data [and] the frequency of transfer between different parties," Dapin said.
Some industry experts have questioned whether CDC is worth this additional complexity. Mark Futcher, partner and head of DC pensions at Barnett Waddingham, commented on the new regulation: "CDC offers potential, but much of what it seeks to fix can already be addressed within the existing DC system if providers are simply given the room to innovate."
“CDC offers potential, but much of what it seeks to fix can already be addressed within the existing DC system if providers are simply given the room to innovate”
And while CDC may offer the opportunity to improve overall outcomes and therefore address some of the adequacy issues facing DC schemes, Harding noted that it "doesn't necessarily unpick embedded inequalities", such as the gender pensions gap and the so-called lost generation, who are considered ill-prepared for retirement.
At the same time, collective scheme design raises its own questions when it comes to fairness. Particularly in a multi-employer model, people of different gender, occupation, location and profession will be paying into the same pool.
"The UK has a very pronounced life expectancy discrepancy problem [based on these characteristics]," Harding said. "If you put them in the same pool, someone is paying someone else's pension."
Isio's McLellan noted that age inequality might be surmounted either by implementing age-related contributions or age-related target income. However, he noted, "things like gender, occupation etc have not been debated yet".
A pension provider might consider dividing members into different pots based on certain characteristics in order to help improve fairness, but they would do so at the expense of the benefits of scale that the collective model unlocks.
Outlook for CDC
Dapin and McLellan agreed that government backing for regulation, combined with mounting interest from employers and sponsors, is creating tailwinds for the development of a CDC ecosystem.
"The [new] Pensions Commission will see this as an easy goal that the government is already behind," McLellan said. "The government is interested in consolidation, long time horizons [and] productive asset investments. [CDC] ticks a lot of the boxes."
He said he expects a possible carve-out for CDC in the government's £25bn scale mandate for DC master trusts and LGPS pools.
"The barriers to a multi-employer, whole-of-life CDC scheme are material, but if you were a sponsor and you had the choice of getting a 30 to 40 per cent better outcome, why wouldn't you?" he said.