Collective Defined Contribution

What is Collective Defined Contribution (CDC)?

As part of a “to and through” or “whole-life” CDC retirement solution, CDC can provide employees, and pension savers in general, what most of them want in retirement:

• an inflation-linked income, more affordably than annuities do
• that is payable for life
• without requiring them to make any big, complex financial or investment decisions

Employers and employees contribute fixed contributions as a percentage of pay, just like a regular DC scheme. 

CDC works by pooling these contributions, and investment returns on this pool of money. In doing so that means risks are pooled across the membership. The performance of members’ investments and members’ demographic, particularly longevity, experience are reflected on a scheme-wide basis to provide a target pension. 

This means that, at outset, while the pension will be expected to keep pace with the cost of living, actual adjustments to pensions each year will vary depending on investment returns, inflation and life expectancy etc. 

Crucially – experience in the scheme is met by adjusting pensions, meaning that there is no ability to seek more money from employers or members. CDC is, after all, money purchase in nature.

Aon’s experience and extensive work in this area suggests well-designed CDC schemes targeting inflationary increases at outset ought to have a relatively low likelihood of cutting benefits. Nevertheless, in providing these benefits, savers will need to accept there will be circumstances when their pension can reduce as well as increase.

What are the Advantages of Collective Defined Contribution (CDC)?

Aon’s research from 2013 revealed that whole-life CDC could be expected to deliver, on average, over 30% higher outcomes than DC contributions life-styled into annuity purchase.

CDC therefore offers the potential to deliver greater efficiency – better bang for buck, than from annuity purchase – by pooling savings and investment returns to provide an income for life in retirement, that keeps pace with the cost of living and without employees and retirees having to make complex decisions.

Compared to DC used for income drawdown, savers are ensured an income for life. This is because longevity risks are pooled.

How Can Aon Help with Collective Defined Contribution (CDC)

Aon's unmatched experience in CDC means we can help you to consider, design and implement the CDC scheme design or solution that best meets employer, employee and retiree objectives. Whether that is to be delivered via a single i.e. own-trust CDC scheme, a industry-wide multi-employer, employee and retiree objectives. Whether hat is to be delivered via a single i.e own-trust CDC scheme, an industry-wide multi-employer CDC scheme or as part of a commercial master trust offering whole-life multi employer or decumulation-only CDC - we have the deep expertise and experience to help you.

Aon has been at the forefront of CDC's development in the UK since our industry-first research in 2013 (and many since), and is very committed to CDC and its introduction to the UK.

Our innovative work led to us being appointed by Royal Mail in 2015 to help them design their CDC scheme, and subsequently being appointed between 2020-2022 by a UK sector where our work and innovation for their 150 employers, 200k employees directly shaped the UK government's multi-employer whole-life CDC regulations.

Aon is working with several employers and prospective providers on the evolution, design and implementation of their CDC schemes.