Collective defined contribution (CDC) arrangements could change the nature of trustee decision-making, and trustees should give as much attention to governance as scheme design, Zedra has warned.

CDC is considered an alternative approach to the more traditional defined benefit (DB) and defined contribution (DC) arrangements, where CDC schemes pool members' and employers' contributions in a single fund to provide a target retirement income for life.

Unlike defined benefit (DB) schemes, benefits are not guaranteed and can be adjusted up or down depending on the scheme's funding position and investment performance.

Zedra client director, Sam Burden, said that while CDC has largely been discussed as a model that has the potential to “bridge the gap” between DB and DC pensions, it could also change the nature of trustee decision-making.

He explained that CDC trustees will need to make ongoing judgements that balance competing priorities, including different forms of risk, fairness between generations and the long-term sustainability of the scheme.

“This makes governance critical,” he said. “Trustees need confidence not only in the decisions they make, but in the processes and frameworks that support those decisions.

“Where decisions have the potential to affect members’ benefits, those processes should be established, tested and understood well in advance. You don’t want to be designing the process at the same time as making difficult decisions.”

He added that CDC has “significant potential, but its success will depend on more than scheme design alone”.

Trustee boards should consider whether they have the right governance, experience and perspective to meet the demands of this evolving landscape.

“Preparing now will put schemes in the strongest position to make balanced, well-informed decisions when it matters most,” he concluded.

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