Policymakers should build increased flexibility into the new retirement CDC framework to improve member outcomes, according to a leading pension consultant.
Hymans Robertson is calling for the government to allow more flexible approach to retirement CDC, and for current tax restrictions to be eased, as this risks limiting the effectiveness of this new retirement option for UK savers.
It adds that there is a need for carefully designed transfer options, particularly in the early years of retirement to ensure better outcomes.
The government is currently consulting on retirement-only CDC options. Legislation to allow broader multi-employer CDC plans, covering both accumulation and decumulation, are included in the Pensions Schemes Act.
Hymans Robertson says that retirement CDC can help meet the complex demands of members by improving pension outcomes and providing security, but adds that the broader pensions system falls short when it comes to offering flexibility, particularly in the early years of retirement. The consultancy is calling for rule changes to help facilitate this, which it says would make retirement CDC a more attractive option.
Hymans Robertson head of DC market Paul Waters says: “With the right design and appropriate safeguards, it should be possible to introduce greater flexibility into CDC without undermining the benefits of risk sharing. But policy change would be needed to enable this.
“The tax position needs to be looked at to enable someone receiving a CDC scheme pension to transfer to an income drawdown policy.
“There are also logistical barriers when designing solutions that move customers from income drawdown to R-CDC under flex-and-fix designs which could be removed. And financial advisors will need clarity on their requirements when evaluating these types of decisions for their clients.
“From an actuarial scheme design point it can be managed, for example, some form of underwriting and the actuary setting terms that protect the risk sharing of the scheme from unhealthy members transferring out.”
He adds: “There’s a broad challenge facing the pensions industry as it balances competing member priorities. Individuals are not one-dimensional and while they value security, they also want flexibility and control. At the same time they are looking for the highest possible retirement income. Meeting all these demands involves trade-offs that the industry is grappling with as it designs retirement propositions.”
He says that automatically moving members into a retirement income product that protects against running out of money would be particularly successful at improving member outcomes at scale.
This is recognises and is the premise behind including default guided retirement solutions in the Pension Schemes Act. Waters says that defaults can also play a part by building in an element of security, with longevity protection to prevent people from running out of money.
But he adds: “ It’s helpful, however, that products allow for flexibility if the customer wants to do something else, especially in the early years of retirement.
“Pension schemes and providers are trying to design options that meet these requirements. The early flex–and–fix type of DC designs that have been developed have sought to address this tension but often involve complexity or compromise. Retirement CDC has the potential to be a major step forward in providing a solution. It can provide a secure income for life and help address the very real risk of individuals running out of money, it just doesn’t score highly on flexibility.”
