Modelling conducted by consultancy Lane Clark & Peacock covering the last 80 years has shown that well-designed CDC schemes prove resilient to radically different market conditions.
The analysis by LCP used actual historic returns and market conditions to model outcomes from different types of pension arrangements over time, highlighting that over three out of the four time periods, the CDC pensioner ended the 20-year period with a pension that beat inflation. Only over the extreme stagflation regime of 1963–1983 was there a material real loss.
LCP’s modelling shows CDC delivers consistently stronger and more stable outcomes than individual DC across all four historic economic regimes modelled, outperforming inflation in three out of four 20 year periods. CDC smoothed volatility by avoiding “point in time” losses at retirement, from a member perspective sitting between DC and DB in terms of risk and stability.
CDC’s ability to maintain exposure to growth assets throughout retirement, unlike DC annuity purchase, was found to underpin its resilience. Strong markets fed directly into higher pensions, while downturns did not permanently lock in lower outcomes.
Ivan Buzulutsky, a partner at LCP, says: “Our analysis highlights how different pension designs respond to very different economic environments. CDC does not eliminate investment risk, nor does it guarantee outcomes. Instead, it changes how risk is shared and how outcomes adjust over time.
According to the LCP research, younger members see stronger outcomes because they can benefit from “cheap accrual” during weaker market periods and have longer to recover from volatility. Older members have some protection of short-term pension purchasing power, with outcomes shaped by how increases and accrual costs shift year to year.
