This week saw the launch of the “Retirement CDC” (“r-CDC”) consultation by the Minister for Pensions, Torsten Bell. A r-CDC is a decumulation, CDC (collective defined contribution)arrangement and stands in contrast to a whole-of-life CDC arrangement, the latter covering both accumulation and decumulation phases.

The government now seeking to extend the Occupational Pension Schemes (Collective Money Purchase Schemes) Regulations 2022 which came into force on 1 August 2022 and which facilitated the launch of the UK’s only single or connected employer scheme (SCES), The Royal Mail Collective Pension Plan. The extended regulations will cover multi-employer CDC schemes (for unconnected employers) as well as r-CDC arrangements and will integrate with the 2022 regulations in some aspects, for example Part 4 of the 2022 Regulations on valuation and benefit adjustments.

Before diving into some of the financial management aspects of the latest consultation it is worth noting that for now the government is not considering a universal provider due to complexity of policy development but acknowledges the potential benefits for the self-employed and in the area of investment as outlined below:

“Another potential option is to operate Retirement CDC through a universal provider. This has the advantage of opening CDC income in retirement to everyone, including the self-employed.

The universal provider would receive member pots at retirement, invest the collective fund, and pay members a retirement income for life. To avoid market issues, the methods and factors used to price sustainable retirement income could be public, regularly reviewed, and subject to approval by parliament. The collective fund would also be significant, able to invest with a very long horizon and support major infrastructure projects.

Nest Pensions and the Pension Protection Fund are potential organisations with the scale to serve as a universal Retirement CDC provider. While a universal provider model for Retirement CDC may offer long-term advantages, it would require significant policy development and time to implement. To ensure alignment as closely as possible with the guided retirement provisions in the Pension Schemes Bill 2025—and to enable Retirement CDC to function as a default pension benefit solution—we consider the model proposed in this consultation to be the more practical option at this stage. However, we will continue to monitor developments in the Retirement CDC landscape and assess whether a universal provider may become more appropriate in the future, either alongside or as a replacement for the current proposed approach.”

Given the much heralded benefits of r-CDC, with estimates of a c. 40% uplift in pension income amounts relative to an annuity purchase expectations are high. This blog does not aim to comment on the merits or otherwise of CDC vs other retirement income solutions but instead aims to:

• provide a brief overview of some of key issues that are likely to be debated during the forthcoming r-CDC consultation by providing an overview of what is being consulted on. Rather than trying to address all the issues I will highlight a few in the area of scheme design and then provide a list of other issues that will no doubt be discussed in the coming weeks and which provides the basis for follow-up blogs on this topic. the focus on scheme design is because scheme design principles such as guardrails for sound financial management, income smoothing and ensuring intergenerational equity will be important for success.

• remind readers of the benefits of the UK’s principles-based approach to regulation by contrasting the approach being taken by Canadian regulators in a recent consultation on draft regulations to cover their own version of r-CDC which they refer to as a Variable Payment Life Pension (VPLP).

1.     Prescription vs Principles

As we progress through the debate I suspect that one overarching point that should serve as our North Star is to recognise the philosophical differences between global regulators in their approach to regulating financial services. The UK has a long history of a principles-based approach to regulation. In introducing our own decumulation solution it would seem not only consistent but pragmatic to continue our focus on principles-based regulation as was the case for the 2022 regulations.

A useful reminder of the importance of this comes from Retraite Québec, the public supervisory pensions body in Quebec which earlier this year consulted on draft regulations to allow the establishment of a Variable Payment Life Pension (VPLP) fund; VPLP is Quebec’s label for a decumulation CDC solution offering a lifetime pension to DC plan members, with the payment amount varying over time based on the fund’s investment returns and the mortality experience of the beneficiaries.

In responding to the consultation the Canadian Institute of Actuaries noted in their letter of 11 July 2025 that “The CIA appreciates Retraite Québec’s (RQ) efforts to strictly regulate this new product. However, we feel that an approach geared more to principles rather than a prescriptive framework would allow for a more flexible and effective rollout. Such an approach would encourage innovation while continuing to protect plan members.”

2.     Pricing principles on member entry and for pension benefit adjustments

The draft regulations focus on the concept of actuarial equivalence in pricing transfers into the scheme:

“…the expected value of rights to benefits provided (by the r-CDC) upon the receipt of a transfer should be equal to the transfer value received. This approach is congruent with the requirement in whole-life schemes for the expected value of accruing benefits to be actuarially equivalent to the contributions paid. Members should also join on terms which are consistent with the valuation for pension increases (unless a scheme is using ‘cohorting’)”.

For future adjustments to the pension benefit, the regulations laid out in 2022 are referenced by noting:

“To avoid bias in favour of a particular group of members and to limit the volatility of the benefit adjustments, CDC schemes are required to follow strict rules on benefit adjustments. These requirements include using central estimate assumptions for valuations and ensuring that increases in benefits are sustainable for the remaining lives of the membership – these principles will remain crucial for Retirement CDC schemes.”

What is to be welcomed here is the focus on a principles rather than prescription. Contrast this to the approach in Quebec which led the CIA to make the following observations:

“We are concerned that the current requirements ̶particularly with regard to annual adjustments… could give rise to significant costs for pension plans that implement VPLPs”

In essence the CIA’s concern arises from the prescriptive approach taken by Retraite Québec towards pension adjustments and as shown below:

The timing and formulaic nature of this type of pension adjustment mechanism creates challenges for

• interest rate risk management,
• smoothing, and
• financial management. A specific example relates to private market valuations which tend to be lagged but the prescribed formula does not allow the flexibility to take a lagged approach to pension adjustments (i.e. awarding pension adjustments based on investment performance which relates to an earlier period but one in which all valuations have been received)

3.   Single pool vs cohorting?

It is envisaged that two broad categories of scheme design may emerge, i) single pool and ii) cohorting.

A new joiner to a “single pool” r-CDC plan, who joins following a period of better-than-expected investment return and mortality gains, stands to benefit from these past gains which provide the new joiner with an immediate buffer against future poor performance of the single pool.

Cohorting provides a mechanism for reducing intergenerational inequity relative to a single pool. Under a cohorting approach the problem in the above example would be much less likely to happen since past gains accrue to specific cohorts of new joiners. Depending on the length of the cohorting period there would be greater or lesser cross-subsidisation. As an example, Australian Retirement Trust’s Lifetime Pension product uses monthly cohorting. The draft regulations in the UK allow for rolling monthly cohorting.

The proposed cohorting mechanism deserves an entirely separate blog.

As an aside, this idea of cohorting is not new and there are parallels to product design features once contemplated in the world of with-profits.

4.Investment strategy

a)       Pre-retirement phase investment approach

The consultation highlights one of the investment challenges with a r-CDC arrangement which accepts transfers from other schemes. These transfers can lead to a “break” in the retirement journey, creating an unnecessary cliff-edge for the investment portfolio at the point of retirement. This is likely to limit investment options in the accumulation phase because investments are phased into lower risk investments as the member approaches retirement thereby limiting some of the benefits of being able to adopt a long-term investment horizon. The impact can be mitigated when a single plan offers both accumulation and r-CDC options but even here either the member must be defaulted into the r-CDC option or actively choose it well ahead of retirement to facilitate continuity of investments.

There are likely to be a range of solutions to avoid such a cliff-edge for transfers from external providers but I suspect all will involve a degree of complexity and additional cost (direct cost and/or opportunity cost) to the member.

b)      Post-retirement phase investment approach

For a r-CDC, two key drivers of investment strategy will likely be:

a) the objective to sustain CPI inflation-linked pension increases over time and

b) the impact of investment strategy on pricing for new joiners as this will influence commercial success relative to other retirement income options such a annuities and income drawdown.

Favoured investments may incude those that offer some or all of the following characteristics

• Excess returns above CPI inflation. As an example Australian Retirement Trust’s decumulation, Lifetime Pension product adopts an investment strategy targeting CPI+4%p.a. and adopts the following asset allocation (as at 1 July 2025) – 45% in listed equities; 30% in unlisted assets and alternatives and 24% in fixed income. Over a 10-year period the fund as outperformed it’s target of CPI+4% p.a. (net of fees) achieving 7.19% vs c. 6.8% for the benchmark.

• Equity portfolios that are constructed to limit downside risk and generate predictable returns. There is likely to be a significant future opportunity for active asset managers to construct these portfolios for r-CDC providers using, for example, a variety of techniques to cheapen the cost of downside protection compared to hedging using put options.

• Predictable inflation-beating returns. 25-year UK index-linked gilts currently offer a 2% real return but year-to-year returns are more volatile and so create mark-to-market challenges. Shorter-dated index-linked gilts are less volatile and still offer 50-100bps p.a. in excess of inflation.

• Total returns that are driven by predictable, reliable and good quality yield or income and low volatility capital growth, for example, contractual income assets such as some types of infrastructure assets – core and core-plus infrastructure assets may command larger allocations.

For now I will leave it there and conclude by pointing to topics which could be the basis for a follow up blog post:

1.       Transfer of FCA-regulated pension pots to r-CDC: risks , benefits opportunities

2.       Viability / minimum size / Member flow and pot sizes needed for financial stability

3.       Winding up options

4.       Costs: establishment and ongoing

5.       Member contact: marketing and communication approaches

6.       Guided CDC

7.       Charge cap

8.       Principles for member quotations and disclosure at entry and ongoing illustrations

9.       Facilitating bulk transfers into a r-CDC without member consent

10.     Withdrawal options