A redesigned CDC model, which offers collective drawdown, could deliver 75 per cent more in retirement outcomes, when compared to an annuity, according to PPI research.
These figures were in a new research paper — Making CDC work for the UK — published by The Pensions Policy Institute (PPI) and Kings College London.
The figures show that collective drawdown could outperform both flex-then-fix models of decumulation, as well as different structured CDC arrangements, although by a smaller margin.
This report also found that collective drawdown has the potential to offer members more choice on their investment strategy. This could allow for greater investments into productive assets, while also providing flexibility for those with religious or ethical stances on investment decisions.
The research said that collective drawdown could also provide a simpler scheme for members to understand, making it easier to calculate transfer values and be more straightforward to regulate.
However, it also noted various issues which would need to be resolved to implement the scheme design, which would necessitate new regulation and potential legislation, in addition to plans announced by the government in October for the roll out of multi-employer CDC arrangements.
The report stated that current CDC schemes can outperform both DB and DC options, and cost less due to risk sharing. In addition, the report determined that CDC schemes could benefit members by sharing longevity risk, but it added that it was impossible to improve all member outcomes by sharing investment risk.
The report also cautioned that there remained potential risks, and if a CDC schemes were mispriced this would reduce efficiency. It adds that effective risk management and member communications are critical for any collective pension design.
Hymans Robertson head of DC market Paul Waters says: “We welcome today’s paper, released by the PPI and the in-depth analysis that has been completed. In particular, the exploration of alternative retirement risk sharing designs that are going through CDC regulation at the moment.
“Risk sharing in retirement can deliver better member outcomes than DC in many ways. PPI’s research shows an alternative design construct to CDC. They note the potential for it to deliver higher retirement income and cite simplicity as a key feature. We agree these are important goals.
“However, the idea that members retaining flexibility to manage their own investments in retirement to match their risk appetite is not a feature we think is universally better. A ‘do it for me’ approach where investments are pooled in a CDC scheme and managed by the trustee will be preferred by many.
“Our expectation is that the greatest benefit from risk sharing for DC members can be achieved by the industry first delivering on the multi-employer whole of life and retirement-only CDC designs that are underway, with further innovation along the lines of the ideas in today’s PPI paper, and other solutions we see in development for the market, following.
“Whatever the design construct used, achieving scale from these new retirement products will be very important to deliver the benefits for members.”
PPI head of modelling and co-investigator for the project Timothy Pike says: “We are incredibly proud of the analysis the PPI has contributed to this timely report, helping to close the knowledge gap on how CDC schemes can work in the UK. As the sector gears up for a future with a potentially larger role for CDC schemes, it is vital we understand how we can optimise retirement saving outcomes.”