Collective defined contribution (CDC) schemes—an introduction

The following Pensions practice note provides comprehensive and up to date legal information covering:

  • Collective defined contribution (CDC) schemes—an introduction
  • What is defined ambition?
  • What is a collective defined contribution scheme?
  • Advantages of CDC schemes
  • Simplicity
  • Risk sharing
  • Higher returns on invested funds
  • Economies of scale
  • Perceived greater certainty of post-retirement income than DC schemes
  • Disadvantages of CDC schemes
  • More...

Collective defined contribution (CDC) schemes—an introduction

A collective defined contribution (CDC) scheme is a type of defined ambition scheme.

What is defined ambition?

One of the key principles of defined ambition is the idea of ‘risk sharing’ in the sense that neither the employer nor the members bear all or a majority of the risk in the pension scheme. A defined ambition pension scheme has some features that are found in a traditional defined benefit (DB) pension scheme and some features that are found in a traditional defined contribution (DC) pension scheme.

According to the Department of Work and Pensions (DWP), the:

'aim of a [defined ambition] pension would be to create greater certainty for members than is provided by a pure DC pension. It would also seek to ensure less cost volatility for employers than current DB pensions.'

In a traditional DB scheme, the employer tends to bear all of the risk in terms of the fund's investment performance, inflation and member longevity. There has been a marked shift away from traditional DB as a result of various factors including:

  1. economic factors

  2. the treatment of DB liabilities in company accounts, and

  3. an increasing regulatory and financial burden

Most DB schemes have a funding deficit which further increases the financial demands placed on employers participating in or with responsibility for such schemes.

In contrast, in a traditional DC scheme, the member bears

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