Greater flexibility in CDC pensions could improve retirement outcomes
Collective defined contribution (CDC) pensions are gaining real momentum in the UK. They offer a compelling way to improve retirement outcomes by providing members with a more predictable income for life. But as the market evolves, one challenge is becoming clear: flexibility.
Increasing flexibility in retirement-CDC (R-CDC) is key to unlocking its full potential for UK pension savers.
Tension at the heart of retirement design
Designing retirement solutions has never been simple. Members want different things, often at the same time. They want security, flexibility and the highest possible retirement income.
Balancing these priorities means trade-offs. And that’s something pension schemes and providers continue to grapple with.
Individuals are not one-dimensional. While many value the certainty of a steady income, whether through an annuity or CDC, they also want the freedom to adapt their retirement plans as circumstances change, similarly to the way drawdown enables. This is especially so in the early years of retirement when circumstances can change quickly. Meeting all these needs in a single solution is one of the defining challenges for the pensions industry.
Why CDC matters for retirement outcomes
RCDC has the potential to address some of the biggest risks facing defined contribution (DC) savers today by:
- Provide a secure income for life through risk sharing
- Reduce the risk of members running out of money
- Help deliver higher and more stable retirement incomes.
These features make R-CDC an attractive option for schemes looking to improve member outcomes at scale.
However, this comes with a trade-off. R-CDC is designed to prioritise income security over individual control, which means it does not naturally offer the same level of flexibility as income drawdown.
Early flex-and-fix type DC designs have sought to address this tension, but these approaches often involve complexity or compromise. R-CDC has the potential to represent a meaningful step forward, offering a secure income for life while helping to address the very real risk of individuals running out of money.
A ‘flex-and-fix’ design is one in which members enter a temporary flexible drawdown period before being moved to another decumulation option at a later age (eg annuity purchase or R-CDC at age 75).
The role of defaults and guided retirement
Defaults and guided retirement solutions will play a critical role in shaping better outcomes. This is already recognised in the pensions landscape and is part of the rationale behind guided retirement's inclusion in the Pension Schemes Act.
Automatically moving members into an income product that protects against running out of money has the potential to improve outcomes at scale. This approach also aligns with wider policy developments that aim to support better decision-making at retirement.
Defaults can:
- Embed longevity protection
- Reduce the burden of complex decisions
- Deliver more consistent outcomes across large groups of members.
But defaults need to be designed with care. Members’ needs can change, and retirement is not a one-off decision. Particularly in the early years, flexibility can be just as important as security.
Why flexibility matters
While R-CDC provides strong foundations for delivering a secure income, the current system does not always support the level of flexibility members expect.
This is most evident in the early years of retirement, when individuals may want to:
- Adjust their income
- Respond to changing circumstances
- Access alternative retirement products.
In practice, this can be difficult. Constraints in the wider pensions framework, including tax and regulatory considerations, can limit the ability to move between products or adapt retirement strategies.
This creates a gap between what members want and what the system allows.
Introducing flexibility without losing the benefits
The key question is not whether R-CDC should offer flexibility, but how to introduce it without undermining its core benefits.
There are practical ways to do this. Schemes could explore carefully designed transfer options or phased approaches that allow members to retain some choice, particularly in the early stages of retirement.
The challenge is to strike the right balance. Too much flexibility could weaken the benefits of risk sharing. Too little could limit the appeal of R-CDC for members who value control.
With thoughtful design and appropriate safeguards, it should be possible to achieve both.
What needs to change
To support this, policy and regulation will need to evolve.
Areas to consider include:
- Revisiting tax rules that currently prevent someone receiving a R-CDC scheme pension from transferring to an income drawdown policy
- Enabling smoother transitions between income drawdown and R-CDC. This includes addressing the logistical barriers that currently make it difficult to move customers from income drawdown into R-CDC under flex-and-fix designs
- Providing clearer guidance for financial advisers on their requirements when evaluating these types of decisions for their clients.
Removing unnecessary barriers would allow schemes to design retirement solutions that better reflect how people actually use their pensions.
From a scheme design perspective, schemes can manage flexibility carefully. Approaches such as actuarial controls and clearly defined transfer terms can help protect fairness across members while still offering choice.
A key moment for CDC in the UK
CDC is at an important stage of development. With growing interest from policymakers, employers and providers, it is moving from concept to reality.
Retirement CDC can play a major role in improving retirement outcomes. But to fully realise that potential, it needs to align with the expectations of modern savers.
That means combining:
- Security through a reliable income for life
- Simplicity through well-designed defaults
- Flexibility to adapt to changing needs.
Getting that balance right will be critical to long-term success.
Bringing flexibility and security together
The future of retirement design is not about choosing between flexibility and security. It is about delivering both in a way that works for members.
Greater flexibility in retirement CDC, supported by targeted policy change, could be a significant step forward. It would allow schemes to provide better outcomes while maintaining the benefits of collective risk sharing.
For UK pension savers, this could mean greater confidence in retirement, more resilient income, and solutions that feel practical as well as secure.
Supplied by REBA Associate Member, Hymans Robertson
We're one of the longest established independent consulting and actuarial firms in the UK
