CDC (Collective Defined Contribution) should be structured to include a variety of risk-sharing options in order to provide positive member outcomes says Hymans Robertson.
Hymans Robertson provides a range of solutions for CDC pensions in a recent paper titled ‘DC: Developing a framework for the next government.’ These include whole-of-life CDC and market-based decumulation-only models.
CDC is expected to be supported by the party that forms the next government, and with this legislative term coming to an end, the paper lays out changes that should be implemented after the election.
This includes ensuring intergenerational fairness, creating benefits through scale, and harnessing inertia to create good outcomes for the majority, as well as the need to attract employers and providers to support and adopt CDC.
The firm also says that clear regulations that offer assurance and permit essential innovation will also be necessary.
Hymans Robertson head of DC markets Paul Waters says: “The government is giving a lot of encouragement to CDC and there’s clearly a need to help savers boost their retirement income. CDC is an opportunity to deliver better pensions. It could help millions of savers, reduce the burden of decision-making on members, share risk equitably between members and employers, and re-establish the social contract between generations.
“And the opportunity to pool longevity risk through CDC solves one of the biggest challenges facing DC savers. CDC will allow members to spend a set pot of money effectively over a time horizon that could easily be 3 years or 30 years. It offers the potential to sweat the same amount being saved and deliver higher pensions which is an attractive prize.
“However, for CDC to thrive and be inclusive for the benefit of members and employers, it needs scale and diversity which innovation can provide. Offering a variety of approaches would enable the power of market forces and lead to both choice and good value for money for members. Developing CDC as just a single plan design risks it not being adopted by the majority of schemes and could easily leading to confusion and poor outcomes for savers, by fitting a round peg into a square hole.
“The first CDC plan being launched now should be celebrated. But, as we move forward from this to developing it further, it can, and should, take different forms. UK pension schemes and their members are not homogenous.”