This is a an article from Damien Bowden who has been a proposition manager at large firms. He wants to know that he and others joining a CDC plan have the opportunity of opting out. He is right to bring this to people’s attention as it is an area that schemes could be unfair, hoping to restrict people from transferring by offering poor transfer values. I hope that this is something that TPR is considering in its due diligence that forms part of authorisation. It has always been an area of mystery to those looking to transfer out of DB schemes. CDC should be standardised so that actuarial discretion is limited.
Damian Bowden
Introduction
CDC should be permitted as a default retirement solution only if members can opt out of CDC and into a comparable DC route without losing employer contributions. Otherwise, CDC risks becoming an economic lock-in for those who do not want to use it.
The ethical test for CDC is whether an active member can reject the collective wrapper without being financially penalised. The issue is not CDC itself, but whether implementation preserves choice for members with different needs without having to sacrifice outcomes e.g. employer matching.
CDC is more restrictive than a normal default fund
CDC or Collective Defined Contribution scheme where member and employer contributions are invested collectively and used to provide target benefits which are likely to improve overall outcomes on average. Most pension members want something simple that is managed for them but for those who want choice – CDC is a restrictive nightmare.
Instead of opting out of the default, you are now stuck in it, because your employer decided that this would be the best option available. Limited member choice already exists in auto-enrolment, especially if your employer chooses a scheme that does not have the fund selection you want. This is not a criticism of auto-enrolment as it has drastically improved pension participation however CDC risks extending the weaker aspects of the policy.
At least with a DC pension you can opt out of the investment choice or make a different choice however with CDC you must reject the scheme. If you are unable to opt out of CDC whilst still receiving contributions – you are practically locked in with your choices removed.
Active members face opportunity costs
Members with different needs arising from different risk appetites, ethical preferences, retirement timings or other planning considerations may lose out due to the CDC model.
This can lead to large, compounded differences over time, eroding future wealth generation due to not being able to invest with your risk or ethical practices. Those who want to take more or less risk, invest according to their ethical principles or align their pension with wider financial planning should be able to without suffering financial penalty.
Looking at the chart which has been amended from Corporate Advisers: Best and worst default funds over the past 10 years with the world index and S&P 500 added in for comparison. Different asset allocations can produce materially different outcomes over time which is why active members may value investment choice. The chart is not intended to prove that active members will outperform defaults, but to show that asset allocation and provider design can materially affect outcomes.
The difference in providers is stark, and would we expect to see such a difference with returns within differing CDCs? Although it may reduce individual risk, it will still produce different outcomes based on scheme design due to investment strategy, actuarial assumptions, smoothing policy and governance.
We can argue that democracy itself is the majority asserting its will on the minority and I could understand a utilitarian approach that better average outcomes for the majority should be prioritised. CDC may be justified in restricting some freedom for better average outcomes but the fairness on those who wish to sit outside of a CDC scheme should not be so easily ignored. Good policy, however, should lend itself to safeguard choice for a minority when it is feasible. A dual pathway model for active members creates the safety of CDC but maintains the DC individuality for those who seek it.
Pension Freedoms and decumulation flexibility
Pension freedoms introduced choice into pensions and in that case also complexity. You only retire once, and a lot of decisions happen without the ability to take it back. CDCs look to smooth some of this complexity with the scheme able to design the retirement income structure or pathway for members.
CDC legislation does not prescribe a single standard benefit shape. Instead, each CDC scheme must have an authorised scheme design, supported by scheme rules, actuarial advice, modelling and TPR authorisation. In practice, this means the structure of benefits including the balance between target income and any lump sum is shaped by the scheme design rather than selected individually by each member.
For example, the Royal Mail Collective Plan provides a one-off lump sum which, for each year a member pays in, is 3/80ths of pensionable pay in that year, based on taking it at age 67. This illustrates that lump sum design in CDC may be scheme-led rather than individually selected.
As a result, members may not experience tax-free cash in the same way as they would in individual DC drawdown, where many expect to access up to 25% of crystallised benefits as pension commencement lump sum, subject to tax rules and allowances. The issue is not necessarily that CDC may remove lump sums, but that it may reduce member control over the amount, timing and shape of retirement benefits.
A common edge case may be a member with a government pension scheme who does not need another source of income but rather wants the benefit in form of lump sum payments. This would be possible in some cases but if employers are having to choose one scheme for all, without a dual approach it may lead to worse outcomes for someone.
Opt out is only meaningful if employer contributions are preserved
At the moment if you opt out of your DC workplace pension you forgo any employer matching. Employer contributions are effectively part of total reward and can represent an immediate uplift that is difficult to replicate through any investment strategy.
These are a key part of the overall compensation received for working.
If a member decides they do not want to be enrolled within a CDC because it does not fit their needs, then it creates an economic pressure to join something that may not address their needs in retirement. This also ties back into the opportunity cost that members will face if compelled into a CDC wrapper.
Although members may have the opportunity to transfer out, this will not make up for the potential impact from the lost opportunity cost or solve the issue of having spent years in an investment structure that the member would not have chosen. There is also a risk that CDC transfers could become more complex over time, particularly if regulators become concerned about members giving up a target income-for-life benefit. If advice requirements or additional safeguards are introduced, transfer-out may become less practical than it appears.
Conclusion
In reality, there needs to be two paths available when looking at a potential CDC future to maintain choice for members. The default CDC path and the active DC path, which does not impact the contribution amounts that the members will receive. Without this we are sacrificing the minority for the ‘greater good’ and placing a burden on the employer when making a choice which may have a drastic long-term impact on someone’s future.
The engaged pension member may be a minority, but their needs should be considered. There are a multitude of needs when it comes to both accumulation and decumulation with CDC being great in some cases, but care should be taken in making someone choose a route due to economic pressure.
Pension freedoms have added in complexity but innovation for the majority should not be done at the expense of the minority. The ethical test for CDC is whether an active member can reject the collective wrapper without being financially penalised. If not, then CDC is a restriction on pension freedom without members being given a non-penalised alternative.
Sources:
Retirement Voice 2025 | Standard Life
Collective defined contribution (CDC)
Exclusive: Best and worst default funds over past 10 years – Corporate Adviser