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In October last year, I reported on the launch of the UK's first Collective Defined Contribution (CDC) scheme and the potential advantages and drawbacks this could bring to scheme members. The UK defined contribution pensions landscape is now on the brink of another significant evolution.
Last week, the government published revised regulations following consultation, which open the door to unconnected multi-employer CDC schemes. With the new regulations expected to come into force in July 2026 and the Pensions Regulator's authorisation window anticipated to open in the latter half of 2026, unconnected multi-employer CDC schemes are just round the corner. But what hurdles must an unconnected multi-employer CDC scheme clear?
One of the main concerns which the newly published regulations aim to address is the potential for unfair outcomes as a result of the 'smoothing' (intergenerational cross-subsidy) aspect of CDC schemes. In order to be authorised, the new regulations require schemes to meet an actuarial equivalence test. At a minimum, this means providing inflation-linked benefits (unless a reduction is necessary) and ensuring that the expected value of members' rights to benefits are at least equal to the value of contributions expected to be made to the scheme, calculated on an actuarial basis.
This is an attempt to balance the key benefits of CDC (longevity risk pooling and intergenerational cross-subsidy) with the need to mitigate intergenerational unfairness. In simple terms, the scheme must be designed so that younger members are not unfairly disadvantaged by the 'smoothing' feature of CDC schemes. The trustees and actuary must consider whether the member contribution rate is fair, bearing in mind the accrual rate and the target pension under the scheme rules.
The regulations also create structural protections in the form of "sectionalisation". Where a new employer wants to join an unconnected multi-employer CDC scheme and that employer's workforce is materially different from the existing scheme membership (either in terms of age or industry sector), the trustees may require the creation of a new section within the scheme. The purpose of sectionalisation is to prevent, for example, a new group of employees who are much older than the main pool of scheme members from joining the main pool, thereby diluting the main pool's assets and being cross-subsidised by the main pool's existing, younger members.
The Regulator's updated Code of Practice (which is not yet published) is expected to set out the Regulator's expectations regarding the circumstances that may trigger a requirement to sectionalise, as well as the information the trustees will be expected to provide to satisfy the Regulator that sectionalisation is appropriate.
The department of work and pensions (DWP) has stated that CDC schemes could increase retirement incomes by (a potentially optimistic) sixty per cent. Whether employers and members will share the same optimism towards unconnected multi-employer CDC schemes is something only time will tell.
The DWP has also recently launched a consultation on CDC schemes.
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