The industry should be optimistic that the next generation of collective defined contribution (CDC) schemes can deliver fairness alongside the broader benefits they offer to savers, LCP has said.

Writing in a new blog post, LCP partners, Sean Garratt and Helen Draper, argued that while CDC schemes were widely expected to provide higher retirement incomes than traditional DC arrangements for a comparable level of contributions, careful scheme design and regulation would be key to ensuring equitable outcomes for members.

CDC schemes are expected to appeal to savers seeking a reliable income for life in retirement without the need to make complex investment decisions about drawdown or annuitisation.

However, as the first UK schemes begin to take shape, some commentators have questioned whether CDC arrangements can be fair to all members.

Concerns have centred on potential intergenerational imbalances and whether members who live longer - who statistically tend to be wealthier - could benefit disproportionately from collective risk-sharing.

LCP stressed that these issues were being addressed through the design of emerging schemes and regulatory safeguards.

Among the features highlighted was the requirement for multi-employer CDC schemes to pass an 'actuarial equivalence' test.

This means the value of pension benefits provided must match the value of contributions paid, adding a layer of protection to help ensure younger and older members receive equitable value.

The firm also noted adjustments under consideration to reflect differences in life expectancy.

To avoid unintended transfers of wealth from those with shorter life expectancies to those with longer life expectancies, schemes were considering whether accrual rates could reflect factors correlated with longevity, such as job type or salary.

The partners emphasised that longevity pooling remained a core feature of CDC, with adjustments aimed at balancing risk sharing against known demographic differences.

In addition, they said that CDC schemes must use best estimate assumptions, meaning there is an equal chance that future investment returns will be higher or lower than expected.

The blog added that CDC structures could also reflect members’ changing priorities over time.

Younger members, it said, could tolerate short-term volatility in pursuit of long-term value, while those approaching retirement placed greater emphasis on income stability.

Under current design proposals, members within five years of retirement should have a clear view of their expected income.

Draper observed that, as CDC is new and evolving, there were "innovative approaches" being considered, including whether to compensate younger members for greater variability in potential outcomes.

"By sharing risks between members, CDC aims to deliver more equitable outcomes over time,” she added.

Meanwhile, Garratt stressed that while risk transfer is inherent in CDC, it is designed to support desirable outcomes, such as higher pensions, lifetime income, and no complex decision-making for members.

"Careful benefit design is key to avoiding unnecessary risk transfer between generations or demographic groups," he warned.

"We are optimistic that the coming wave of CDC schemes will achieve this and earn the trust of future members and their employers.”

---