The DWP recently launched its consultation on draft collective defined contribution pensions scheme regulations, which is due to close on 31 August. Once these regulations are firmed up, by the end of this year in all probability, single or connected employers will be able to open collective defined contribution schemes for their employees. The Royal Mail, in a show of unity between employer and trades union, will be the first to do so.

We will have to wait until early 2022 before any further consultations to explore extending collective defined contributions availability more widely. But that is the prospect. So, it’s worth exploring the possibility that within the next few years, master trusts could be able to offer collective defined contribution decumulation widely to savers who have built up savings in other defined contribution pension schemes.

As this is a possibility within this timeframe, why would workplace advisers (for now) consider pointing pension savers in the direction of collective defined contributions at retirement? To answer that question, it’s important to understand the similarities and differences of collective defined contributions and annuities.

CDCs vs annuities

Collective defined contribution decumulation schemes, like annuities, will offer a regular monthly income in retirement for the entire life of the buyer. A collective defined contribution will also offer the prospect of that income increasing yearly in line with prices, thus preserving the pensioner’s standard of living. The expectation is for a substantially higher pay out over the duration of retirement.

A 2009 Government Actuary’s Department study found that the median improvement in outcome offered by collective defined contribution “is as high as 39% for some members.” A 2012 paper by the Royal Society of Arts indicated a 37% boost to retirement income outcomes through collective defined contribution.

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