CDC – Feature
Simon Eagle, senior director and head of WTW’s CDC pension team, says: “What I take from those results is that employers expect CDC to become available through master trusts, and I expect the industry to respond to that by servicing the market.”
Standard Life’s Altman also envisages CDC as part of the mas- ter trust offering, noting that there are “considerable advantages for individuals and its right that the government explores how scale could be achieved and risks could be managed. “If we can find a way of over-coming these challenges in ways that have wide-spread support then I can see CDC taking a big- ger role in the UK pensions landscape, although those are not inconsiderable issues to overcome,” she says.
Brand new solution
Where there is more consensus on the possible benefits of introducing CDC to the UK market is in decumulation-only arrangements, and which form a key part of the DWP’s consultation.
The DWP says decumulation-only CDC “could provide those approaching retirement with an income product that allows them to share investment and longevity risk. In addition, a CDC decumulation fund has the potential to provide, on aver- age, better returns than the traditional options of annuities or drawdown”.
This is because their longer-term investment horizons mean they will be able to invest more in higher return seeking assets for longer. This, the DWP argues, means members can be con- fident that they have a fully managed investment fund, provid- ing them with an income for life although the annual benefit level is not guaranteed.
Cameron says decumulation-only CDC “is definitely worth exploring” since, to a degree, it combines the flexibility of draw- down with the security of an annuity. “An annuity gives you a guaranteed income for life but no flex- ibility, drawdown gives you huge flexibility but no guarantees that you won’t run out of money. CDC is somewhere in between; you will be sure to get something for the rest of your life, but there’s no certainty on the amount you receive.” Eagle agrees, adding: “There is lots of research that people want an income for life in retirement, but relatively few buy an annuity because they haven’t been good value. Decumulation- only CDC would be a new option that could fill the gap.” Further, decumulation-only CDC can be combined with taking tax-free cash and keeping some of the pot invested in flexible drawdown.
“Thinking has moved on in favour of a more blended approach that allows people to achieve the best of an annuity and draw- down,” Altman says. “We expect to see significant innovation and product development over the next couple of years, and welcome CDC being part of the pensions saving toolkit.”
I don’t need to hire bouncers to keep the entrance clear for people who want to come in and talk to us about CDC.
Stefan Lundbergh, Now Pensions
Levelling the playing field The government’s central motivation for considering expand- ing CDC is to bring the DC member experience closer to that enjoyed by DB members. However, simply offering risk-shar- ing among members will not achieve parity alone. “The only thing that can level the outcomes between DB and DC is contributions,” Lundbergh says. “If you don’t pay the same amount [as DB] you’re not going to get the same out- come, whether it’s from CDC or traditional DC.” Yet since CDC schemes can be a higher-risk investment strategy which, in theory can provide a significantly higher pension for the same level of cost as a DB arrangement, and significantly more income than buying an annuity. Looking at the RMCPP, WTW calculated the expected pension provided would typically be 40% higher than a DB environ- ment and 70% higher than with a DC-insured annuity. “So while CDC can’t level the playing field between DB and DC overall, it has the potential to improve member outcomes in general,” Eagle says. Collective DC offers a genuine third way in UK pension sav- ings. It has the flexibility of DC with some of the certainty of DB, but whether there is great demand for such an alternative is unclear. Certainly, if CDC advocates want to see the arrangements get off the ground in any meaningful way, their focus will have to be on communicating its benefits to employers and their workforces.
As Altman concludes: “Getting communication right is front and centre to making this work.”
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