Government green lights the collective DC revolution

This is a significant step forward in the evolution of CDC in the UK, which to date has only permitted single- and connected-employer CDC schemes (of which there is only one). All being well, the regulations, together with a new Code, will come into force on 31 July 2026. This means providers could apply to the Pensions Regulator for authorisation to operate an unconnected employer CDC scheme from next summer.

Alongside this, the government has also launched a consultation on enabling ‘Retirement CDC’ schemes to be established in the UK. This is ‘phase three’ of the government’s CDC revolution and comes at an important time as it could offer an alternative option for trustees and providers of DC schemes who will be required to make available retirement income solutions for their members when the new guided retirement duties come into force (you can read more about these in our Autumn edition of DC Practical Notes).

What is CDC?

CDC schemes are a new type of pension scheme in the UK, with the first (and, to date, only) CDC scheme in the UK being launched by Royal Mail in October 2024.

In a CDC scheme, both the employer and member contribute to a collective fund. This allows investment and longevity risks to be pooled, unlike traditional DC.  Like a defined benefit (DB) scheme, the collective fund pays scheme members an income in retirement. However, unlike in a DB scheme, the amount of retirement income a member receives may vary, depending on the funding level of the scheme.

Under a whole-life CDC scheme, as the name suggests, members build up benefits under the scheme during their working life and then receive a pension from the same scheme in retirement.

In contrast, the government’s proposed ‘Retirement CDC’ schemes (previously referred to as ‘decumulation-only CDC’) would permit individuals who have saved into a DC scheme to transfer their pot at retirement into a CDC arrangement which would provide them with a retirement income.

‘Whole-life’ CDC

In October 2024, the government launched a consultation on draft legislation designed to extend whole-life CDC provision beyond single or connected employer schemes. Given the scale that is needed to operate a CDC scheme, it is expected that opening up the legal framework so that CDC schemes can be made available to unconnected employers will lead to CDC becoming a reality for more than just the Royal Mail. We considered the proposed CDC regime for unconnected employers in our recent CDC Insights publication.

Last Thursday, the government published its consultation response together with a final set of regulations, which have been laid before Parliament. Taking account of industry feedback, the government has made several helpful amendments to the draft regulations. These include:

• revising the draft regulations so that organisations can establish an unconnected employer CDC scheme without the need for a participating employer to be there from the start
• modifying the ‘actuarial equivalence’ requirements, which are designed to ensure fairness and prevent excessive cross-subsidisation between members or employers, to address concerns that the requirements in the draft regulations would have been unworkable
• removing the requirement that the scheme proprietor (i.e. the entity that stands behind a scheme financially and that makes commercial decisions about a scheme) only carries out activities that relate directly to unconnected employer CDC schemes. This gives commercial providers more flexibility over which entity can act as the scheme proprietor, and
• removing the requirement for a scheme proprietor to directly hold the necessary financial resources to meet the financial sustainability requirements. Instead, subject to being able to satisfy the Regulator about this, it will be sufficient for a scheme proprietor to have access to (rather than directly holding) the required level of financial resources. This will give providers greater flexibility over how they structure a CDC scheme.

The government has also confirmed that the authorisation and supervision regime for unconnected employer CDC schemes will be separate from the regime that applies to single and connected employer CDC schemes and also separate from the regime that applies to DC master trusts.

Despite concerns being raised about the proposed rules on promoting and marketing unconnected employer CDC schemes, the government has decided not to amend these. Instead, it has left it to the Pensions Regulator to provide the clarity and reassurances requested by stakeholders in its updated Code of Practice. The updated Code (which will be consulted on separately) is expected to come into force around the time the regulations come into force.

There are a number of other changes made which we will cover in a future CDC Insights briefing.

‘Retirement CDC’

The government has also launched a consultation on permitting retirement-only CDC schemes to be established in the UK. The government believes that this has the potential to open the benefits of CDC membership in retirement to many of the 16 million people in the UK currently saving into a DC scheme, offering a wider range of options to DC savers.

This consultation is timely as the Pension Schemes Bill, which is currently going through Parliament, will place duties on trustees of DC schemes and workplace DC providers to put in place retirement solutions that are suitable for their members. These will need to be designed to, in most cases, provide a regular income and protection against longevity risk, something that Retirement CDC schemes would be able to do. These duties are due to be introduced in 2027 (for DC master trusts) and 2028 (for other workplace DC schemes).

Significantly, the government is proposing that Retirement CDC will operate as a ‘wholesale’ market: meaning access to it can only be offered by trustees or providers through a workplace DC scheme or arrangement. The government does not intend that there should be a retail market: meaning individuals will not be able to access Retirement CDC directly themselves, although it is seeking views on whether there should be any exceptions to this.

The consultation also floats the possibility of a universal retirement CDC provider being established which the government says could be operated by NEST or the Pension Protection Fund. It says this would have the advantage of opening CDC income in retirement to everyone, including the self-employed. However, the government recognises this would require significant policy development and time to implement and it considers the model proposed in the consultation to be the more practical option at this stage. But it says it will continue to monitor developments and assess whether a universal provider may become more appropriate in the future, either alongside or as a replacement for the current proposed approach.

We will look in more detail at the proposals for retirement CDC in a future CDC Insights briefing.

Evolution or revolution?

We have long believed CDC has an important part to play in the future of the UK pension system. Last week’s developments show that the government shares this view, with the Pensions Minister reiterating he wants to see “fewer, bigger and better pension schemes”, and that “collective funds are a key part of that”. At the recent Pensions UK annual conference, he also made clear that he wants UK pension schemes ‘to provide members with a pension once again’. He also expressed concern about the fact DC savers are too often left to manage their own longevity risk. CDC schemes address both of these points.

Now the industry has certainty around the regime for unconnected employer CDC, commercial providers and employers wanting to group together, for example, across a particular sector, can start to firm up their plans around establishing whole-life CDC schemes, potentially from as early as next summer.

The timing of the consultation on Retirement CDC is also significant as trustees of DC schemes and DC providers grapple with what retirement income solutions they should make available to their members under the new guided retirement regime. Introducing this new option has the potential to revolutionise the UK’s DC workplace pensions landscape, by enabling DC schemes and providers to put in place a default CDC income solution for their members at retirement. This could help solve the conundrum of how to turn a DC pension pot into a retirement income and at the same time address what is arguably the greatest risk DC savers face – ensuring their retirement income lasts for life.  This revolution would be turbo-charged if the government can be persuaded to open up Retirement CDC to retail customers too.