5 reasons to consider implementing a multi-employer CDC pension scheme

A multi-employer collective defined contribution scheme pools the risk and investing, and could be another way for employers to support the financial wellbeing of their workforce.

Most workplace pensions help employees build a pension pot but leave them to decide how to turn it into a sustainable retirement income.

A multi-employer collective defined contribution (CDC) scheme offers a different approach. It pools investments and shares risk collectively, providing members with an income for life. The income is not guaranteed and may increase or reduce depending on the scheme’s financial position.

Here are five reasons why employers should consider whether CDC could support their workforce and reward strategy.

1. Improve outcomes without increasing employer contributions

One of the strongest arguments for CDC is its potential to improve member outcomes without requiring the employer to contribute more.

By pooling longevity risk and investing collectively over a longer time horizon, CDC aims to make more effective use of existing contributions. This could provide a higher or more stable retirement income than some individual defined contribution (DC) approaches.

Importantly, employers pay defined contributions and do not take on the open-ended funding risks associated with a defined benefit (DB) scheme. This is particularly of interest for employers that want to improve retirement outcomes but face continued pressure on employment costs.

2. Provide employees with an income for life

Members of traditional DC schemes must decide how to use their pension savings in retirement and ‘spend their pension pot’. They can choose between drawdown, an annuity, cash withdrawals or a combination of these options.

Many employees do not feel ready to make these decisions:

The Financial Conduct Authority’s Financial Lives 2024 survey found that 22% of non-retirees felt unprepared for retirement because they did not understand their options.
A further 31% had not thought about how they would manage financially in retirement.

CDC creates a clearer connection between pension saving and future income.

Rather than giving employees a pension pot to manage throughout retirement, CDC provides an income for life. This removes the need for key retirement decisions and helps protect members from outliving their pension savings.

3. Support productivity and workforce planning

Retirement inadequacy is not only a risk for employees. It can also create a commercial challenge for employers.

The latest research from Hymans Robertson Personal Wealth found that 38% of employees said financial worries had negatively affected their productivity.
37% had taken time off work during the previous 12 months because of financial stress or its effects.
67% said financial stress had affected their engagement or motivation, while 52% had considered changing jobs for better pay or benefits.

Concerns about retirement adequacy may add to these pressures. Employees who cannot afford to retire may remain in work for longer than planned. This can affect succession, recruitment, skills development and workforce costs. It may also increase the number of people balancing work with health or caring responsibilities later in life.

CDC will not remove wider financial pressures or guarantee that employees can retire at a particular age. However, a clearer target income and an income for life could help employees plan with greater confidence. For employers, this could support a closer connection between pension strategy, financial wellbeing, productivity and workforce planning.

4. Strengthen the value of the pension offer

Employees do not always recognise the full value of their workplace pension. CDC could provide a point of difference within the wider reward package.

It may help employers show that they are focused not only on how much employees save, but also on the retirement outcome those savings could provide.

5. Access scale without building a scheme

Establishing a single-employer CDC scheme requires considerable scale, investment and governance resources. This puts it beyond the practical reach of most employers.

A multi-employer arrangement spreads the costs of governance, administration, investment and communications across a larger membership. This could make CDC accessible to a much broader range of organisations, including smaller employers.

Is CDC right for your workforce?

Multi-employer CDC could help employers improve retirement outcomes without increasing ongoing contributions or taking on an open-ended pension liability.

It will not suit every organisation. Employers will need to compare it carefully with their existing DC arrangement, test the likely outcomes and understand how employees may value the trade-off between flexibility and a target income for life.

However, as multi-employer options begin to enter the market, now is the time for employers to consider where CDC could fit within their long-term pension, reward and workforce strategy.