The point of multi-employer CDC is that you share things. You cannot run a scheme on a lifestyle basis, where you invest for how long your members are going to choose to be in the scheme, you must assume they will be in it till they die. You cannot invest collectively for an individual or even one group of people within a wider group.
It is a difficult fact for our investment community to pick up but the CDC investment strategy is not liability driven. The liability driven concept of investment , occurs only when there is a finite duration to the investment, but CDC is not finite, so long as there are new companies to replace old companies, new employees to replace those who are no more, there will be no end to a CDC plan. Please refer to Derek Benstead’s chart.
We had infinite time horizons for DB and now we have infinite time horizons for CDC, we must not invest for failure, that does not work.
I will give as an example a panel conversation held at Manchester which shows how a panel of experts still apply the principles of LDI – that the scheme’s duration is finite, to CDC – where it isn’t.
I thank Sandra for writing up this conversation, but it is not a very sensible conversation, I have put in red the comments of the participants that confuse CDC without finish with DC and DB schemes with closure ahead.
The only thing that the investment strategy of a CDC has to take into acc0unt is that it is paying a pension to everyone in the scheme eventually. Everyone that leaves – is replaced, the sweet-spot remains so long as confidence in pensions remains.
CDC: How do you make it fair?
Sophie Dapin, Krista D’Allesandro, Iain McLellan and Tegs Harding
Guidance should be issued on which categories of scheme members can be pooled together in collective defined contribution schemes, one panellist said as questions of fairness were at the heart of a debate on CDC at the Annual Conference 2025 by Pensions UK.
CDC offers the promise of better outcomes, if not necessarily fairer ones. But while cross-subsidies based on age will not be allowed in multi-employer CDC, there are questions on how other characteristics that feed into life expectancy lead to cross-subsidies.
How CDC schemes are designed is key for input and outcomes, including what people perceive to be fair. In CDC, intergenerational fairness has been a key concern, but there are different ways of looking at this, panellists at the conference suggested – and the mechanistic nature of CDC means design is key.
“That design is really, really important, and it comes down to how are you actually defining what you get out for what you pay in, and who you put in the same pool. And that last bit, there’s no obvious right answer to”said Tegs Harding, a professional trustee at Independent Governance Group who sits on the Royal Mail Collective Pension Plan.
“I’m hoping that we’re going to get some more guidance down the line.”
The UK has a very pronounced life expectancy inequality problem, Harding said.
“If you are a male lorry driver living in Blackpool, you can expect to live around 10 years less than a female lawyer living in London. And the problem is, if you put those two people in the same pool, you can predict in advance who is paying whose pension at the time. And there’s a question of fairness around that”
Different issues intersect in that example, she noted – profession, income, gender and location.
“In theory, if you were thinking about actuarial equivalence or making it actuarially fair, you might want to put all four of those different groups in different pots” .
The rules for multi-employer CDC, set to come in later this year, are clear about not permitting designs where younger members subsidise older members, noted Iain McLellan, a director at consultancy Isio.
“The rules basically have a very strict requirement on age, but they don’t say anything about these other factors that Tegs has highlighted, gender, occupation, salary,”he pointed out.
The consultation on multi-employer CDC last year stated that
“actuarial equivalence at an individual member level or at an employer level is essential for unconnected multiple employer CDC schemes to avoid cross subsidies between employers (which, for example, would occur if one employer has a younger workforce than another)”.
Although each group with different characteristics could be put into a separate scheme,
“every time you take a cut you make your pool smaller”,McLellan cautioned.
“You may avoid some problems, subsidies, but you end up [with] cliff edges between these kinds of gaps.”
The reality of “sharing” is that people do it. They do it in the state pension and they do it it in DB plans. Rich people who want to have their wealth managed for them , opt-out and this is good for the pool as they tend to be the long livers.
Male lorry drivers can be invested in a pool with female investment managers but we cannot set up liability driven investments for both separately. We set up one investment strategy for everyone with the longevity of the pension scheme liabilities being infinite.
Ultimately, older schemes will be invested in by young people, because sharing works like that, when you get big CDC schemes with people joining (when they start working) and leaving (when they die) with companies joining and leaving for the same reasons, then you can say things balance themselves out over time.
Trying to engineer schemes to meet your investment strategy is crazy, instead we should be setting up an investment that suits the sweet spot and does not invest for failure. LDI is admitting failure, so is lifestyling. The liabilities of a CDC fund need to be matched by the pay-outs , there is good stuff in the consultation about cohorts and there’s a lot of thinking about chain-linking which actuaries can discuss.
Can you imagine turning away employers from a multi-employer pension scheme because you thought they had staff who lived too long? Can you see good in planning a CDC investment strategy that didn’t cater for new employers as well as employers leaving. Can you plan for nobody new joining as well as older people dying? That’s the thinking of DB being closed to new joiners – it leads to no future accrual and closure.
All the good thinking is about pay-outs. The investment stuff is incredibly simple and does not to be liability driven, unless the scheme has failed or is planning to.
How to create complexity where complexity needn’t exist! The state pension treats everybody the same and people seem happy with that. Major DB schemes like LGPS treat everybody the same wherever they live and whatever jobs they do and whatever pay they are on. I haven’t heard any complaints about that. So why can’t we have just the one way with CDC? Anything else creates administrative work and the potential for people having to make choices they are ill-equipped to make.
Agree wholeheartedly – all pension schemes (whether personal or collective) should be invested to maximise its projected future cash outflows. In talking about cross-subsidies, you are missing the point about a “collective” scheme which is that those cash flows are aggregated. The “cross subsidy” being talked about is rewarded for all members by the potential outperformance of a collective scheme (estimated at “North of 30% to apparently 100%) compared to individual DC pots.
In any event the impact of expected mortality is considerably reduced the higher the investment return. It appears that thinking has been too conditioned by the negative gilt yield environment when the inflated 20 year past retirement pension was given a present value 25% greater than the year 1 pension.
DB Trustees have been living with (and dealing with) “actuarial
equivalence” since the Pension Schemes Act 1993, if not earlier.
I do hope the current crop of actuaries don’t turn this into a millstone for fledgling CDC schemes.
Hi Henry,
Not that I would class myself as a member of the investment community, but no-one on the panel was making the case for using LDI in CDC schemes. To avoid duplication , I’ve copied the response I posted on Linkedin.
https://www.linkedin.com/feed/update/urn:li:groupPost:2441849-7389188287292133376?commentUrn=urn%3Ali%3Acomment%3A%28groupPost%3A2441849-7389188287292133376%2C7389239785317363714%29&dashCommentUrn=urn%3Ali%3Afsd_comment%3A%287389239785317363714%2Curn%3Ali%3AgroupPost%3A2441849-7389188287292133376%29
CDC works by pooling. As a result, after the event, you will always be able to look back and say whether you benefited from or subsidised the pool (well your dependants/representatives will).
While investment performance will be the key driver of outcomes, how experience is shared (i.e. scheme design) will influence the outcomes for members. It will be important to be transparent to members as to which cross-subsidies you are/aren’t looking to control for.
As we’re not all on LinkedIn, I’ve copied your comment below for other readers:
“For clarity, the discussion was certainly not to make any case for applying LDI in CDC schemes. It wasn’t particularly focused on investment strategy beyond highlighting the usual benefits of investing at scale and members not having to make complex investment decisions.
“I also commented that the closest thing in the UK at the moment – apart from the Royal Mail Scheme – was probably the investment strategy of an LGPS fund.
“The discussion, which I think Sandra [Wolf] did a great job of capturing, was more about transparency and that unconnected multiple employer CDC was going to look and operate differently to single employer CDC schemes (like the Royal Mail scheme).
“We covered the importance of scheme design and being clear about what cross-subsidies you want to or don’t want to allow and the impact that this would have on member outcomes, as ‘fairness’ tends to be in the ‘eye of the beholder’.
“The example that was given is that it may be ‘actuarially fair’ to provide different benefits in a CDC scheme to men vs women, but we don’t think in practice that anyone is going to operate a scheme that does this.
“However, it is then open to a charge of being ‘unfair’ to men vs women.”
I presume actuarial fairness is intended to mean the same as actuarial equivalence?
I always thought fairness was/is about providing what is needed or deserved, while equivalence (sometimes called equality) is about giving everyone the same thing.
Some DB schemes for many years seemed to give different benefits to different members – for example, the contribution cost of senior executive benefits being favourably reduced through averaging in a balance of cost scheme, where the sponsor would always be on the hook for any final top ups.
But I’m not an actuary …
Thanks for reposting my linkedin comment Byron.
Yes – I was using “actuarial fairness” in a similar way to “actuarial equivalence”.
You’ve identified one of the key points we were looking to highlight – should we be considering “fairness” of inputs or outputs and how does this look at an individual level vs at a collective level.
As an example, when many DB schemes were closed they were replaced with age-related DC contribution structures. These aimed to provide ‘actuarial equivalence’ [outputs], i.e. to target a similar level of pension in payment, but ultimately most organisations moved away from age-related contributions as if felt unfair to have different levels of DC contributions [inputs].
There isn’t necessarily a right or wrong answer to how you deal with cross-subsidies (although the regulations won’t allow you to do this by age), but your scheme design will have a big impact on how experience drives member outcomes in practice.