The UK government has launched a consultation on ‘Retirement CDC’, which would allow people who have saved into a defined contribution (DC) pension fund to transfer their pension pot into a collective defined contribution (CDC) scheme at retirement.
The consultation, which launched yesterday, seeks views on policy proposals for the creation of a new type of CDC scheme, which is to be used by pensioner members – a retirement CDC scheme.
These schemes would allow individuals who have saved into DC pensions to transfer their pot at retirement into a collective fund that provides a trustee-managed income for life, adjusted annually based on investment performance and scheme sustainability.
The government is also seeking views on the legislative change which would amend the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991 (“Preservation of Benefit Regulations 1991”) to permit transfers of money purchase benefits, without consent, to authorised CDC schemes. This is already permitted for transfers to master trusts.
Pensions minister Torsten Bell said the consultation takes the next step in the development of CDC schemes as the government builds momentum in this “important” area of innovation to the pension landscape.
He flagged that phase 1 of CDC development saw the government build the framework for single and connected employer CDC schemes, leading to the launch of the UK’s first CDC scheme.
Yesterday, the UK government concluded phase 2 by laying legislation to enable unconnected multiple-employer CDC schemes.
Bell said that this consultation marks the start of phase 3 of CDC development, which he said will “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 those who have spent years building up an individual pension pot”.
He added: “The time is ripe to consult on these next steps. The Pension Schemes Bill 2025, which is currently being debated in Parliament, places duties on DC scheme trustees or managers to have in place a default pension plan for their members, which is designed to, in most cases, provide a regular income, protection against longevity risk and from complex decision making, something that retirement-only CDC schemes would be able to provide. Our test is to provide pensions in exchange for people’s hard-earned savings – not just pots of savings.”
Martin Willis, partner at Barnett Waddingham, said that retirement income is an area where CDC can add value, but highlighted that it presents practical challenges.
“The traditional ‘income for life’ side of pensions has been forgotten to a degree with Freedom and Choice, but many still do value an income for life and the security it brings. It avoids issues of declining financial cognisance with age and helps remove the risk of people running out of money.,” he explained.
Willis added that Pension Freedoms remain a “significant elephant in the room”, pointing out that people are used to flexibility, which supports a modern, phased retirement where individuals keep working while drawing benefits and adjusting their income as their needs change.
He continued: “Schemes will need to decide whether to offer this and whether to make it a default, while employers will have to consider if they wish to participate in that structure. Risk pooling can deliver income benefits but also raises questions around cross-subsidy, health differences and fairness.”
Willis said that marketing will also be a key issue, adding that it is vital that promoted potential outcomes are realistic.
He explained that if done right, Retirement CDC could play a valuable role in improving retirement outcomes and supporting the government’s productive finance aims, but it will require “careful design and collaboration to succeed”.
Iain McLellan, director at Isio, added that the launch of the Retirement CDC consultation is giving greater confidence that the option will quickly follow whole of life multi-employer CDC schemes to help improve outcomes for members of DC schemes approaching retirement.
He said: “We hope the government can keep up the momentum to make sure trustees looking at potential guided retirement solutions have Retirement CDC included in their considerations.”
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