CDC promises a more predictable and sustainable retirement income than traditional DC plans, potentially delivering up to 40% higher retirement income. But this isn’t just a policy shift, it’s also a technological one with evidence to suggest this isn’t just a simple systems upgrade but more a strategic transformation.

The complexity is real. But so is the opportunity. CDC offers a scalable way to contribute to the building of trust in pensions, providing more stable retirement outcomes without reverting to the high cost of DB provision. It’s a middle ground that could reshape a reasonable chunk of the workplace pensions landscape.

Looking outwardly, however we can see some of the general challenges and potential learnings for the UK. A prime example is the Netherlands as it continues to undergo one of the most ambitious pension reforms in Europe, if not the world. The reform, known as Wet toekomst pensioenen, which translate as the Future Pensions Act, is transitioning from traditional DB to a new system of personal pension pots with collective investment and risk sharing. While the reform aims to improve transparency and sustainability, it has exposed significant challenges across the industry, from member expectations to technology and operational readiness.

It is worth noting that CDC in the Netherlands isn’t exactly the same as the UK regs. However, it is still useful to understand the extent of change in a market well suited and experienced in the collective model.

From a pension fund perspective, there is a need to recalculate entitlements, communicate complex changes to members, and manage a delicate shift in expectations. The move from fixed promises to variable outcomes has sparked concern among older members, who fear losing security. Some funds have delayed implementation due to governance hurdles and member resistance. An advantage for the UK is that we are coming from the other direction, moving from individual DC accounts to a collective model that, according to the modelling, has the potential to deliver those higher retirement incomes.

In the Netherlands, administrators continue to face monumental challenges. Aon Netherlands suggested that administrators are struggling to have the systems ready on time to transition. Existing systems were built for DB logic, e.g. fixed accruals, static benefit statements and not for real-time tracking of individual pots, dynamic income projections, and collective buffers. The recalibration of millions of member records has proven more difficult than anticipated, especially when legacy data quality is poor.

This is in turn has created a technology mismatch with several providers discovering their platforms couldn’t support the new model. Systems designed for DB or DC couldn’t handle the change. There have been reports that a pension fund paused its migration after realising its admin system couldn’t model the new benefit formula accurately. The UK’s move toward CDC schemes shares many parallels. Like the Dutch model, CDC aims to deliver stable, lifelong income without DB guarantees. But the Dutch experience shows that success depends on purpose-built technology, not retrofitted systems.

The Dutch reform also highlights the importance of member trust. Without clear communication and intuitive digital interfaces, even well-designed schemes can face an interesting member reaction. Systems will need to handle complex cohorts of members meaning communications will need to be delivered on a mass personalised basis, drawing on data from the core engine.

I think it is fair to say that CDC does divide opinion in the UK, but if done right, it offers a solid middle ground. The Netherlands shows that the path to success is relatively steep but the UK’s huge depth of expertise and brilliance across the industry, will, should schemes put in for authorisation, undoubtedly make a huge success of the reform.

Dan McLaughlin, Country Head – Festina Finance