Could employers offer better pensions without paying more?

Occupational pensions consistently rank among the most valued employee benefits in the UK. At the same time, concerns about retirement adequacy continue to grow, with the UK Pensions Commission recently highlighting that around 43% of working-age people are not on track to achieve a comfortable retirement income.

For employers, this presents a challenge. Employees increasingly value retirement benefits, yet many organisations are reluctant or unable to increase pension contributions in an already demanding economic environment.

Against this backdrop, a new form of workplace pension may offer an opportunity to improve retirement outcomes without increasing employer costs or introducing additional balance sheet risk.

Collective defined contribution (CDC) pension schemes are one of the most significant and innovative developments in UK pensions in recent years.

Enabled through new legislation, CDC schemes aim to deliver more predictable and potentially higher retirement incomes than traditional DC arrangements through the collective pooling of investment and longevity risks.

Importantly, CDC does not require employers to provide guaranteed benefits or be exposed to the funding risks associated with defined benefit (DB) schemes. Contributions remain defined, but the assets are managed collectively to provide a target pension income in retirement.

Perhaps the most important development is the introduction of multi-employer CDC schemes. By adopting a model similar to existing DC master trusts, providers can offer CDC solutions to employers regardless of size. This creates an opportunity for all organisations to access the same features and potential benefits.

No pension arrangement is without its limitations. CDC will not solve retirement adequacy on its own and it will not be the right solution for every employer. However, it has the potential to offer a compelling middle ground between traditional DC and DB pension provision.