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,” she said.  

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,” she said. 

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.”  

There are two ways of dealing with age in CDC, he argued; one would be to put in place an age-related contribution structure in the way some DC schemes had or still have age bands. 

However, “I think most organisations that have adopted that kind of structure have moved away and moved to flat DC contribution structures, because ultimately they're unfair,” said McLellan. “Why are these two people doing the same jobs and they're getting two grand of DC contributions and they're only getting £500?” 

The alternative would be a flat-rate contribution structure with age-based accrual. 

“So those two people get the same amount of money paid in, but ultimately then the amount of pension they build up and that target income they build up in the CDC scheme will have to be age related. So that's a slightly different bit of fairness to deal with,” said McLellan.  

The prohibition of age-related cross-subsidisation “will be a kind of a new thing for people in the UK to get our heads around”, he added. 

CDC could feature in the recommendations the Pensions Commission, McLellan thinks. The Commission is due to publish an interim report in the spring, and make final recommendations in 2027, which will be for implementation after the next election. 

“Compared to NI increases or you know, jacking up auto-enrolment to 12%, it probably feels like an easier answer,” he said, suggesting that Royal Mail’s pioneering of CDC in the UK has strengthened the basis for this. “I expect it to be pretty core from the Pension Commission's things they'll be looking into.” 

On a separate panel at the same conference, Baroness Jeannie Drake and Professor Nick Pearce, two of the three members on the commission, did not mention CDC but referenced intergenerational fairness more broadly. 

“The question facing our commission will be to determine whether the investment and longevity risks that are still borne by the individual saver have settled at the appropriate level, especially when looking at this through the lenses of adequacy and fairness,” said Pearce.  

“So it's crucial, whatever recommendations we make, we provide support for a sustainable pension system... that is fit to hold up through the demographic challenges of this century.” 

Baroness Drake, who was on the 2004 Pensions Commission led by Lord Adair Turner, said the Turner Commission focussed on rebuilding something that was collapsing, adding: “There are issues around fairness, there are issues around intergenerational fairness that probably need more of a focus than they got of the Turner Commission.”