The expected pension from a whole-of-life collective defined contribution (CDC) scheme could be up to 50 per cent better from the same contribution than a traditional DC scheme, analysis from LCP has found.

The consultancy stated that the risk-sharing nature of CDC, and the greater investment freedom this generates, created the potential for “significantly higher pensions” at retirement.

LCP analysed 2,500 simulations looking at a 43-year-old starting a 25-year career and assuming a 12 per cent annual contribution.

Its modelling showed a median CDC outcome of 41 per cent of final salary for a 43-year-old retiring at 68 after a 25-year career and receiving a single life pension.

By comparison, the same person had a median outcome of 27 per cent of final salary in a DC scheme.

LCP noted that, like with DC, there are a range of potential member outcome driven by investment performance.

However, it found that the ability to invest collectively meant that the best CDC outcomes would likely be “significantly better” than for DC savers, and even in difficult economic circumstances, CDC outperformed DC in the “vast majority” of scenarios.

The consultancy added that it expected to see new regulations allowing multi-employer CDC schemes to emerge early in this parliament, and multi-employer CDC schemes could come to market from 2026.

Furthermore, there are expectations that a ‘decumulation only’ CDC model could emerge in the next few years, and LCP urged trustees and sponsors to consider the part these schemes could play in their future provision.

Alongside improved pensions, LCP said it believed CDC schemes could contribute to economic growth, particularly due to their long investment time horizons, as this meant they were well placed to contribute to the potential increase in growth investments by pension schemes.

“With Department for Work and Pensions figures highlighting that two out of every five of working-age people in the UK are currently undersaving for their pension, the new CDC approach could be game-changing for many people,” commented LCP partner, Helen Draper.

“The CDC model has lots of positives for individuals. It targets far higher benefits than DC alternatives, avoids the need for members to make difficult investment decisions and has the potential to significantly increase intergenerational fairness.

“For employers, there is more certainty on the costs to the scheme, support from employee representative groups and more freedom when it comes to choosing contribution rates.

“We have been talking about these schemes for a while, but recent developments mean now is the time for sponsors and trustees to get to grips with this new approach and embrace the many opportunities and benefits they can provide.”

LCP partner and head of CDC, Steven Taylor, added: “We believe CDC schemes have the potential to significantly improve retirement outcomes for the next generation of savers. CDC can achieve this without recreating the employer cost concerns that have hampered defined benefit schemes, and so we believe it will be attractive to employers and employees alike.

“In the early years, CDC schemes will be massively cashflow positive and will have heavily growth-focused investment strategies. This makes them an attractive focus for the new government to help pensions investments into growth assets.”

This article was originally published on our sister title, Pensions Age.

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