On the go: The support for collective defined contribution schemes is growing within the pensions industry, with 48 per cent of employers saying they would consider offering a CDC pension to their DC scheme members at retirement.
During a recent webinar, held as part of Aon’s 2021 virtual pensions conference series, the pensions consultancy polled 61 individuals on this topic.
When introducing this new type of scheme in the pension schemes bill, now the Pension Schemes Act, the Department for Work and Pensions stated that it was considering opening up this benefit format to be used by master trusts in decumulation in the future, which could be achieved by secondary legislation.
Aon’s poll also showed that 38 per cent of 66 respondents would consider offering CDC schemes for their employees to build up a pension, and only 7 per cent were against offering this type of scheme.
Traditional or individual DC arrangements where each member builds up a pot of savings that they may invest as they choose, under the CDC model each member is due annual retirement income but the savings are invested collectively.
Members are not required to make investment decisions, or decisions on their benefits as they retire.
Another difference between informing the claimed superior performance of CDC schemes is that investment risk is pooled and shared between members.
While in individual DC arrangements members typically reduce investment risk as they approach retirement, the pooling of risk in CDC allows its members to hold on to higher-risk, higher-returning assets for longer.
Willis Towers Watson estimated in October a 70 per cent improvement in a CDC pension when compared with a DC pot annuitised at retirement.
Chintan Gandhi, head of CDC at Aon, noted that the results of its pool “were very encouraging”.
“CDC is still an entirely new form of pension design in the UK and one that isn’t even properly here yet,” he said.
“Nevertheless, the support shown in this pooling testifies to how the UK pensions industry is seeing the potential value that CDC can provide to both the employer and member outcomes.”
Gandhi added: “Further regulations and guidance covering wider topics of CDC, such as mulit-employer and decumlation-only designs, including through maters trusts, will soon follow. The dawn of a new pensions era is finally upon us.”
