Research found that 80 percent of defined contribution pension (DC) scheme members would give up their flexibility for a higher income from their pension, while 78 percent would give up flexibility if their retirement income was guaranteed.
This suggests collective defined contribution schemes (CDC) would be a popular option for DC savers, according to pensions and financial services consultancy Hymans Robertson, which conducted the research.
A CDC pension scheme combines elements of defined benefit (DB) scheme and DC. With individual DC schemes, each member has their own pension pot, but with CDC the contributions are pooled in a collective fund. This means individual members have less flexibility, but the returns have the potential to be higher.
Preferred CDC features
When researchers asked savers which features of CDC they liked, 48 percent said it was that it offered them protection against running out of money in retirement. A similar proportion, 46 percent, said receiving a higher overall pension from the same amount saved was appealing.
In October 2024, the government said it would “fast-track” plans to modernise the UK’s pensions system by broadening access to CDC schemes. It is currently conducting a consultation on multi-employer CDC.
Hymans Robertson said the backing of the government will be vital for CDC success, particularly as 63 percent of people polled for the research said that CDC would be more attractive if it was actively promoted through a government initiative. Three-fifths (60 percent) said they would be more positive about CDC if it was run by a government backed pension provider.
CDC trade-offs
Savers also said that they would be willing to accept some of the trade-offs of CDC to gain the overall rewards.
Findings revealed that 32 percent would accept a 1-2 percent reduction in retirement income in some years in exchange for a higher overall pension. More than a third (34 percent) said they would accept a 2-5 percent reduction of retirement income in some years to get a higher income in most.
Around one in ten (12 percent) said they would not be comfortable with any income reduction in some years to get a higher overall retirement income.
Almost two-thirds (62 percent) said they would be happy with different generations receiving different amounts of retirement income, which can happen under CDC, provided their own pension is greater than it would have been through alternative pension schemes.
Paul Waters, head of DC markets at the consultancy, said: “Our research shows that there’s a wide appetite for CDC amongst scheme members. A higher, secure retirement income from the same pension contribution is certainly a compelling draw. The government and the industry must listen to these results and use them to catalyse developments in rolling out CDC. Risk sharing and collective saving, such as CDC, will be crucial tools in the ongoing battle to improve the adequacy of pensions.”
He emphasised the research findings that if the government plays a role in the development of CDC, it will help gain the confidence of savers.
“The consultation currently under review on multi-employer CDC was an important sign that the government will continue to support the growth of CDC, but it will be good to see further commitment. Communicating the benefits of CDC will be a crucial step in starting to improve adequacy and something the new pensions minister [Torsten Bell] should consider. I hope that he cuts through the noise and throws his weight behind CDC – it could be the cornerstone of improving the quality of retirement for countless people across the UK.”
He added: “We know that CDC isn’t a one-way bet – the benefits come with trade-offs and it’s important these are well understood. It’s helpful to see that savers are willing to embrace the concept of CDC – even with some of these trade-offs.”
