Both defined contribution (DC) and collective defined contribution (CDC) have a “crucial” role in delivering retirement objectives for the next generation of savers, according to LCP.

In its Future of Pensions? report, LCP said that CDC strategies are expected to deliver around 50 per cent higher incomes in retirement than a traditional DC annuity.

The firm attributed this to CDC strategies’ ability to invest a larger share in growth assets and avoid the need for individual de-risking, enabling them to deliver stronger outcomes.

LCP noted that CDC schemes could provide around 30-40 per cent higher retirement incomes than a low-cost DC drawdown strategy, and 15-25 per cent higher than high-conviction DC strategies, which concentrate investments in a smaller number of strong investment ideas.

LCP partner and head of CDC, Steven Taylor, said the UK is now at an “inflection point” in pension provision, as CDC schemes are on the “cusp of becoming a reality”.

Given this, he argued that “now is the time” for sponsors and other stakeholders to take a step back and look at how different solutions can be practically applied for their savers.  

According to LCP, the higher expected outcomes from CDC schemes are likely to be more important than the flexibility of DC arrangements for many savers, particularly those with lower or moderate earnings and a preference for straightforward retirement options.

However, the firm sees key roles for both DC and CDC in the future UK pension landscape.

The report suggested that CDC will appeal to those with moderate incomes who value financial certainty in retirement, prefer limited decision-making and want to cover regular financial commitments, while DC is suited to savers valuing flexibility, ownership over their own pot and who want a more engaged role in their saving journey. 

Looking ahead, LCP said it expects a greater demand for CDC solutions that provide an income for life, without the need to purchase an annuity.

This trend, it noted, is likely driven by growing awareness of challenges related to retirement adequacy, coupled with the first wave of retirees beginning to access income drawdown options.

The report also suggested that CDC will become a mainstream pension offering in the market.

Yesterday, the government gave the green light on regulations for multi-employer CDC pension schemes, which are set to be laid in parliament today (23 October).

The new regulations aim to allow the expansion of CDCs to more employers and address a growing demand among workers to receive a more secure retirement income.

LCP said the emergence of multi-employer regulations will result in new schemes entering the market from 2027, giving both small and large employers access to a range of multi-employer CDC schemes.

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